NABET Northeastern Association Of Business, Economics, and Technology
2007 Proceedings
of the 30th Annual Meeting October 25th & 26th, 2007
Edited by:
Dr. Jerry Belloit Clarion University of Pennsylvania
NABET Proceedings 2007 i
Table of Contents NABET OFFICERS ...... vii NABET EXECUTIVE BOARD ...... viii HISTORY AND PURPOSE OF NABET ...... ix
FERTILITY, MONEY HOLDINGS, AND ECONOMIC GROWTH: EVIDENCE FROM UKRAINE Svitlana Maksymenko, University of Pittsburgh, Winner, Best Faculty Paper ...... 1
EDUCATING ENTREPRENEURS: LESSONS FROM THE FINE ARTS James R. Donaldson, Juniata College Karen J. Rosell, Juniata College ...... 15
THE NEED FOR HISPANIC-OWNED BUSINESSES TO TARGET NON-HISPANIC CUSTOMERS, VENDORS AND SERVICE PROVIDERS Roger Hibbs, Kutztown University Scott Schaeffer, Kutztown University SBDC ...... 23
ENTREPRENEURSHIP: BUSINESS’S LIBERAL ART Donald Mong, Slippery Rock University ...... 27
WE ARE WHO WE MEET Marlene E. Burkhardt, Juniata College ...... 35
WEAVING STORYTELLING INTO AN ORGANIZATIONAL BEHAVIOR CURRICULUM: BUILDING COMPETENCIES Joan M. Blewitt, King‘s College, McGowan School of Business John J. Ryan, King‘s College, McGowan School of Business ...... 39
A STUDY OF ADVISING RESOURCES PERCEIVED BY FIRST-YEAR STUDENTS AND TRANSFER STUDENTS Margaretha Hsu, Shippensburg University of Pennsylvania April Bailey, Shippensburg University of Pennsylvania ...... 46
DO YOU SEE WHAT I SEE? DESIRED LEARNING OUTCOMES AND ACHIEVED LEARNING OUTCOMES IN INTERNATIONAL STRATEGIC ALLIANCE Stevenx. Si, Bloomsburg University Minuddin Afza, Bloomsburg University ...... 50
A COMPARISON OF THREE ASSESSMENT TOOLS FOR BUSINESS SCHOOLS Carolyn LaMacchia. Bloomsburg University of Pennsylvania Carl J. Chimi, Bloomsburg University of Pennsylvania David Martin, Bloomsburg University of Pennsylvania ...... 60
PATENTED TAX LOOPHOLES-POLICY AND PRACTICAL CONSIDERATIONS John Grigsby, Lebanon Valley College ...... 69
NABET Proceedings 2007 ii
THE ASSOCIATION BETWEEN CORPORATE GOVERNANCE AND AUDIT FEES Cindy K. Harris, Ursinus College ...... 76
HORSES, REAL ESTATE AND THE HOBBY LOSS DEBATE Barry H. Williams, King‘s College ...... 86
ALTERNATIVE ENERGY HYBRID AUTOMOBILE TAX SUBSIDIES: AN ANALYSIS OF COSTS AND BENEFITS TO THE TAXPAYER AND PUBLIC Jerry Belloit, Clarion University of Pennsylvania ...... 92
DOES THE SALE OF SUBDIVIDED LAND CREATE CAPITAL GAIN OR ORDINARY INCOME? Jerry Belloit, Clarion University of Pennsylvania Anthony Grenci, Clarion University of Pennsylvania ...... 98
A BINARY CHOICE MODEL FOR PREDICTING BANK ACQUISITIONS John S. Walker, Kutztown University of Pennsylvania Karen L. Randall, Ursinus College Henry F. Check, Jr., Kutztown University of Pennsylvania ...... 101
DOES YEAREND PORTFOLIO RESTRUCTURING BY COMMUNITY BANKS BOOST SHAREHOLDER RETURNS? John S. Walker, Kutztown University of Pennsylvania Henry F. Check, Jr., Kutztown University of Pennsylvania ...... 109
THE INFLUENCE OF U.S. PRESIDENTIAL ELECTIONS ON EXCHANGE RATES Dean Frear, Wilkes University Jennifer Edmonds, Wilkes University ...... 127
SOUTH CENTRAL PENNSYLVANIA – TRACKING THE REGIONAL ECONOMY Ken Slaysman, York College ...... 137
WHY IS SELLING NOT TAUGHT IN THE PENNSYLVANIA UNIVERSITY ENVIRONMENT Edward J. Fox, South University ...... 142
MODELS DESCRIBING LOYALTY AND THE APPARENT MISMATCH BETWEEN THE MARKETER AND THE CONSUMER Jefrey R Woodall, York College of Pennsylvania ...... 145
DETERMINANTS OF CLASS PARTICIPATION: A PRELIMINARY INVESTIGATION Justin C. Matus, Wilkes University Robert D. Kuschke, University of Missouri – St. Louis ...... 149
START YOUR OWN BUSINESS: A SYNTHESIZING FINAL GROUP PROJECT IN AN INTRODUCTORY BUSINESS COURSE Leon Markowicz, Lebanon Valley College ...... 155
NABET Proceedings 2007 iii
ASSESSING WRITING ACROSS THE BUSINESS CORE Nancy Coulmas, Bloomsburg University of Pennsylvania Stephen Markell, Bloomsburg University of Pennsylvania William Neese, Bloomsburg University of Pennsylvania ...... 165
COLLEGE TRUSTEE GOVERNANCE: AUGMENTING CARVER’S POLICY GOVERNANCE WITH ACCEPTED CONTROL AND PLANNING SYSTEMS Spring Walton, University of Maryland, University College Charles Walton, Gettysburg College ...... 169
EVALUATING THE IMPACT OF INTEGRATED BUSINESS CURRICULA ON STUDENT OUTCOMES: IMPLICATIONS OF CURRICULUM TRANSFORMATION TO MAKE STUDENTS MORE MARKETABLE John Buttermore, Slippery Rock University ...... 173
AN ATTITUDINAL SURVEY OF CLASSROOM RESPONSE SYSTEMS Eric L. Blazer, Millersville University ...... 178
WILIFE -- ITS NEW INDOOR SURVEILLANCE CAMERA AND ITS CONTRACT MANUFACTURERS IN CHINA Al Mudrow, WiLife, Inc. Draper, Utah Gabriel Jaskolka, Tiffin Unversity, Tiffin, Ohio ...... 185
CUSTOMER SATISFACTION MEASUREMENT AND THE MANAGEMENT OF CUSTOMER SERVICES: A CASE STUDY Jonathan H. Silver, Alvernia College...... 197
INCOME DENSITY AND MARKET POTENTIAL IN PENNSYLVANIA SMALL TOWNS William Bellinger, Dickinson College ...... 198
FANTASY SPORTS AND SPORTS MARKETING James Talaga, La Salle University Christopher Orzechowski, Cardiology Consultants of Philadelphia ...... 209
ARGUABLY, NO ONE KNOWS MORE ABOUT CANDY AND TECHNOLOGY THAN TEENS Arlene Peltola, Cedar Crest College ...... 218
AN EMPIRICAL STUDY OF UNDERGRADUATE STUDENT'S BASIC FINANCIAL MANAGEMENT COURSE ACHIEVEMENT RELATIVE TO STUDENT BACKGROUND AND PREREQUISITE TIMING. Gary Leinberger, Millersville University Douglas Frazer, Millersville University ...... 223
IMPACT OF STRATEGY ON FIRM PERFORMANCE IN AN EMERGING MARKET: AN EMPIRICAL EXAMINATION OF TURKISH INSURANCE INDUSTRY Ilyas Akhisar, Marmara University J Rajendran Pandian, Youngstown State University ...... 228
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MARKET EFFICIENCY IN THE POST-LOCKOUT NHL: ELIMINATING THE REVERSE FAVORITE- LONGSHOT BIAS Rodney J. Paul, St. Bonaventure University Andrew P. Weinbach, Coastal Carolina University Mark Wilson, St. Bonaventure University ...... 234
AN EMPIRICAL ANALYSIS OF THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT WITH A FOCUS ON ASIA Katarina Keller, Susquehanna University241 Andrew Gilbert, PricewaterhouseCoopers Anne Stankiewicz, Goldman, Sachs & Co...... 241
A CORRELATION ANALYSIS OF PRICE OF CORN AND PRICE OF GASOLINE Joseph Cheng, Ithaca College ...... 255
IS THERE A RELATIONSHIP BETWEEN CORRUPTION AND JOB CREATION IN RESOURCE RICH OIL AND GAS DEVELOPING COUNTRIES? Olumide Ijose, Slippery Rock University of Pennsylvania Jesus Valencia, Slippery Rock University of Pennsylvania ...... 259
EXECUTION, THE SECRET TO GREAT PERFORMANCE David E. Vance, Rutgers University School of Business Camden ...... 264
SELLING A STATE-OWNED ENTERPRISE IN THE PEOPLE’S REPUBLIC OF CHINA Dan Benson, Kutztown University Roger Hibbs, Kutztown University ...... 271
EFFECTIVELY ADDRESSING ENTERPRISE COMPLIANCE RISK John A. Kruglinski, Kutztown University of Pennsylvania ...... 274
TOWARD AN UNDERSTANDING OF AUDIT FIRM ROTATION AS PUBLIC POLICY: THEORIES OF DEVIANT BEHAVIOR Mark L. Usry, Bloomsburg University of Pennsylvania Wilmer Leinbach, Bloomsburg University of Pennsylvania A. Blair Staley, Bloomsburg University of Pennsylvania Mike Shapeero, Bloomsburg University of Pennsylvania ...... 281
DESIGNING A LAPTOP SURVEY AT A PENNSYLVANIA COLLEGE: A PRECURSOR TO INTRODUCING INNOVATIVE TECHNOLOGIES W. R. Eddins, York College of Pennsylvania ...... 291
ASSESSING DIVERSITY OUTCOMES IN A COLLEGE OF BUSINESS MANAGEMENT CURRICULUM Anne M. McMahon, Youngstown State University Andy Chang, Youngstown State University Carolyn K. Mikanowicz, Youngstown State University C. Louise Sellaro, Youngstown State University ...... 308
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KNOWLEDGEABLE DECISION MAKING: DOES SOURCE OF KNOWLEDGE IMPACT EFFECTIVE USE OF INFORMATION TECHNOLOGY? CJ Rhoads, College of Business, Kutztown University ...... 318
CORPORATE DISINFORMATION & BUSINESS SOCIAL RESPONSIBILITY: THE CASE OF CLIMATE CHANGE DENIAL Bruce Lindsley Rockwood, Bloomsburg University of Pennsylvania ...... 330
USE OF REALWORLD EVENTS TO TEACH PRINCIPLES OF ECONOMICS Abdul B. Pathan, PA College of Technology ...... 341
CONTRACT DESIGN FOR QUALITY CONTROL IN SUPPLY CHAIN MANAGEMENT Dong-Qing Yao, Towson University Nanyun Zhang, Towson University ...... 346
JOURNAL OF THE NORTHEASTERN ASSOCIATION OF BUSINESS, ECONOMICS AND TECHNOLOGY: CONTENT AND PROCESS ISSUES Kevin J. Roth, Clarion University Of Pennsylvania ...... 356
LURKERS AND PARTICIPATION INEQUALITY IN SERVICE ELECTRONIC WORD OF MOUTH Dr. Lawrence E. Burgee, Towson University Dr. Erin M. Steffes, Towson University ...... 366
PROGRAM OF THE ANNUAL MEETING OF THE NORTHEASTERN ASSOCIATION OF BUSINESS, ECONOMICS, AND TECHNOLOGY ...... 378
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NABET OFFICERS
President
Norman C. Sigmond Kutztown University of Pennsylvania
Vice-President, Programs
Dean Frear Wilkes University
Vice-President, Publicity
William Eddins York College of Pennsylvania
Treasurer Arshad Chawdhry
California University of Pennsylvania
Secretary Able Ghoads
Mansfield University of Pennsylvania
NABET Proceedings 2007 vii
NABET Executive Board Chairperson Norman Sigmond, Kutztown University of Pennsylvania
Vice-Chairperson Jonathan Kramer, Kutztown University of Pennsylvania
Treasurer Arshad Chawdhry, California University of Pennsylvania
Secretary Able Ghoads, Mansfield University of Pennylvania
Conference Chairperson Dean Frear, Wilkes University
Journal Editor Leon Markowics, Lebanon Valley College
Journal Editor Kevin Roth, Clarion University of Pennsylvania
Proceedings Editor Jerry Belloit, Clarion University of Pennsylvania
Webmaster William Eddins, York College of Pennsylvania
At-Large Martina Vidovic, Bloomsburg University of Pennsylvania Cynthia Benzing, West Chester University of Pennsylvania Michael Coyne, Bucknell University John Walker, Kutztown University of Pennsylvania
NABET Proceedings 2007 viii
History and Purpose of NABET
This organization is in its thirtieth year of existence. It formerly was known as APUBEF (The Association of Pennsylvania University Business and Economics Faculty). It was founded by a small group of Economics professors of the fourteen state universities comprising the Pennsylvania System of Higher Education. Their goal was to provide a platform for sharing and exploring scholarly work among the business faculty of the fourteen state universities in Pennsylvania. As a result of their efforts, the organization has sponsored an academic conference each year for the past 30 years.
Over the years, the fundamental goal of NABET/APUBEF has been to target the business faculty of the small business colleges in Pennsylvania, and surrounding states. The organization has been successful in achieving this goal for the past several years. In 2006 the Executive Board determined that the APUBEF organization should be renamed as NABET and become regional in scope. As a result, the October 2007 annual meeting presented 87 scholarly and pedagogical papers and workshops over two days. It featured authors from eight states including 53 different colleges and universities.
The original founders also established a referred journal, the Pennsylvania Journal of Business and Economics (now renamed as the Northeastern Journal of Business, Economics and Technology). The journal applies a double blind review process and is listed in Cabell‘s Directory. It is published at least once each year, and has a devoted editorial staff supported by an excellent corps of reviewers.
NABET Proceedings 2007 ix
FERTILITY, MONEY HOLDINGS, AND ECONOMIC GROWTH: EVIDENCE FROM UKRAINE Svitlana Maksymenko, University of Pittsburgh Winner, Best Faculty Paper ______
ABSTRACT This paper addresses the great concerns about the declining fertility trend in Eastern Europe. By synthesizing recent theoretical findings, the paper uniquely identifies the channels through which economy and fertility interact in transition economy. The study directs a comprehensive multi-variable vector autoregression analysis to determine the short- and the long-run responses of fertility to unemployment, money holdings, and output growth disturbances in the economy of Ukraine. We find that in a transition economy labor market conditions and households‘ money holdings are indeed important determinants of family decisions to bear and rear children. We identify that unemployment disturbances and monetary incentives explain more than a third of fertility variations. The impulse response, variance decomposition, and sensitivity analyses give a foundation to explore a wide range of policy options to address the issue of declining fertility for countries in transition. These observations are crucial in understanding the scope of interactions between fertility and the state of the economy. ______
INTRODUCTION The key motivation for this paper builds on the timely debate between population pessimists and Recent economic changes and the demographic neoclassical economists. By synthesizing recent transition in developing countries have highlighted theoretical findings and newly developed the importance of considering demographic econometric techniques, we plan to determine the characteristics in economic models, calling for a re- short- and the long-run relationship between fertility exploring the interplay between human capital and and economic growth in transition economy, and to economic growth, as well as the integration of family identify the channels through which they interact. economics with growth theory. The primary purpose of the paper is to quantify a magnitude of the impact of macroeconomy on Declining fertility has reached a below-replacement fertility, and offer a wide range of policy implications level in many East European economies, and has addressing the issue of its declining trend. causes great concerns among politicians and social scientists. According to population pessimists, with a Although most economists would probably agree that huge outflow of a working age population from the macroeconomy and families closely interact, the transition economies, the declining fertility requires magnitude of these interactions has not yet been an immediate policymaker attention from both an measured. In order to fill the gap, we take an economic and a social point of view. In contrast to advantage of a newly assembled data set, consisting the West-European countries characterized by a of monthly information on unemployment, births, similar fertility trend, transition economies are unable money holdings, and growth in one of the low- to attract a large flow of immigrants, and ultimately fertility East European economies (Ukraine) for the will face the repercussions of aging society. period of 1996-2005. To our knowledge, the paper However, the neoclassical growth theory proponents will provide the first systematic empirical evidence argue that the richer is the country, the lower the on a time frame over which socio-economic events fertility rates are, and no drastic actions should be have an impact on fertility and economic growth in taken to change this fertility trend. transition economy.
NABET Proceedings 2007 1 In attempting to measure the extent to which economic growth, and analyzes the gaps in literature macroeconomic conditions affect fertility, we to be covered. Section 3 presents a vector recognize that the population and the economy autoregressive model to estimate short-run responses evolve jointly. It is not only fertility that affects of labor market, fertility, money holdings, and output economic performance, but also economic variables growth to disturbances in transition economy. The that shape the demographic transition. In this paper empirical study includes impulse response, variance we demonstrate that families‘ fertility decisions, decomposition, and sensitivity analyses. Sections 4 labor market conditions, money holdings, and and 5 conclude by interpreting the results, offering economic growth are indeed endogenous. policy implications, and suggesting possible avenues for future research. Moreover, by employing a multivariable vector autoregression model that captures the interactions Literature Review between all variables under consideration, we show that in a transition economy labor market conditions The relationship between population change and and households‘ money holdings are important economic growth remains a subject of passionate determinants of family decisions to bear and rear debate among economists and demographers. The children. We find that the birth rate sharply increases Malthusian investigation of the relationship between immediately following a money holdings population and economic growth that roots to the disturbance. While in a very short run an eighteenth century has undergone a rebirth of sorts unemployment shock adversely affects fertility, in a since the 1970s. In an attempt to find an optimal four-month horizon it starts stimulating households population growth, Razin and Ben-Zion (1975) towards child bearing. The impact of the provide a novel link between population and unemployment shock and the money holding shock economic theories by analyzing an intergenerational can be traced up to two years, with a slowly economic model. Assuming that wage rates and neutralizing pattern. interest rates are parameters to each family and to the whole economy, Becker and Barro (1988) create a We find that the associations between fertility, labor core reformulation of the economic theory of fertility market, and money holdings are significant both in a by directly connecting fertility rates and a capital statistical and an economic sense. Unemployment accumulation across generations. Recent empirical disturbances and monetary incentives explain more studies on fertility and economic growth lend support than a third (13.6% and 20.6%, respectively) of to the Becker and Barro (1988) model and present fertility variations in a transition economy. In this ample evidence that a decrease in fertility benefits paper, we show that in the short run, money holdings economic growth (Tamura, 2000, Ahituv, 2001, and cannot be considered neutral with respect to Doepke, 2004). households‘ childbearing decisions, and correspondingly, a policymaker may employ With a focus on the channels through which these childcare transfers as an effective mean to address the variables interact, Wang et al (1994) propose that declining fertility dilemma. It is our understanding fertility variable should be considered endogenous to that these empirical estimations have never been the labor market conditions. They admit that an performed before, and this paper fills a breach in the employment shock causes a reallocation of time away attempt to measure the impact of the macroeconomy from child rearing towards a higher labor effort, thus and demographic indexes on each other in transition retarding fertility growth, and stimulating production. economies. By employing a structural vector autoregression The paper is organized as follows. The next section methodology, Wang et al (1994) estimate the explores the recent studies on the dynamic modeling relationship between the labor effort, fertility, and of the relationship between fertility choice and economic growth process in the post-World War II United States, and validate the endogeneity of
NABET Proceedings 2007 2 fertility hypothesis. In particular, it is shown that Finally, the literature is silent about important policy employment shocks explain more than a third of the recommendations for a social planner to target forecast error variance for the fertility rate. In economic growth and demographic transition by addition, Wang et al (1994) find that fertility changes adjusting labor market regulations or introducing feed back to the employment and output movements, monetary incentives to child-bearing decisions. The and originate significant variations in the labor objective of our paper is to fill these gaps. growth and the output growth series. Taking into account main assumptions of the Becker Recently, neoclassical growth economists have and Barro (1988) and the Petrucci (2003) theoretical expanded the analysis of channels through which models, this paper introduces an empirical study of fertility and economic growth interact by introducing the relationship between households‘ labor effort- their interdependence with wealth and real money fertility decisions, real money holdings, and holdings. In the Barro and Becker (1989) tradition, economic growth, and provides a complete Petrucci (2003) assumes that families care both about characterization of their short–run dynamics in the a number of children and a dynasty wealth, and economy. Following the Wang et al (1994) shows that the demand for children depends on techniques, we perform a multi-variable vector households‘ real money holdings. Investigating how autoregression analysis to estimate time frames and macroeconomic variables exert an external effect on effects of changes in a socio-economic environment families‘ behavior, Petrucci (2003) discovers that a on unemployment, fertility, money holdings, and higher money growth rate increases fertility. By output growth in transition economy. Based on the reducing real money holdings, money growth empirical results, the paper also offers a wide range diminishes the opportunity cost of a child to be born. of policy implications to address the issue of In turn, lower opportunity cost stimulates people to declining fertility for countries in transition. increase a number of children, and results in a reduction of capital intensity, per capita output, and EMPIRICAL STUDY consumption. With this in mind, Petrucci (2003) concludes that, ceteris paribus an increase in money The objective of this section is to construct an holdings positively affects fertility decisions, (at empirical model of a development process that allows least) in the short run. for dynamic interactions of labor market conditions, household‘s fertility decisions, money holdings, and In spite of an increased interest and a vast amount of GDP growth through the use of a multivariate time research on a topic, the modern family and growth series system. This study employs a vector economics literature falls short to address several autoregression (VAR) approach to estimate both important issues. First, the papers fail to combine short- and long-run responses of all endogenous both channels, i.e. a labor market, and a monetary variables to unemployment, fertility, money holdings, side of the economy, in order to provide a broader and output disturbances. multi-channel link between fertility and the economic growth process. Second, due to unavailability of high Methodology frequency information on fertility, unemployment, money holdings, and economic growth, there are no Assuming the endogeneity of four variables, i.e. labor systematic estimates of output growth and birth rates market variable, fertility rate, money holdings, and impulse responses to changes in macroeconomic output growth, the vector autoregression (VAR) environment in the developing world. Remarkably model is: little remains known about the impact of financial and labor market conditions on households‘ fertility B(L)X t t (3.1) decisions in East Europe, where fertility rates have already reached a below-the-replacement level.
NABET Proceedings 2007 3 Since population growth and money holding are where X t is a (41) vector of endogenous expected to play an important role in the relationship variables; B(L) is a (4 4) nonsingular matrix with other variables, the sensitivity to the ordering of polynomial in the lag operator L, and t is a (41) variables will be assessed. We expect that, if the vector of structural shocks. The exogenous error term model is well specified, this reordering will have no t is independently identically distributed and is qualitative effect on the outcome. interpreted as a structural innovation. The disturbances in the structural equations are serially The reduced form of the VAR is found by solving uncorrelated and uncorrelated with each other: (3.1) for in terms of lagged values of X and t : E( t ) 0 and
D for t 1 E( t ) , (3.2) X t B0 (t B1 X t1 ... Bp X tp ) (3.3) 0 otherwise where D is a diagonal matrix. A conventional As long as X t j is a linear function of assumption is that B0 is a lower triangular. t j , t j1 ,... , each of which is uncorrelated with A long-run causal ordering of the system is chosen as for j=1, 2…, and B 0 as s , follows: labor market variable, fertility variable, t1 s money holding variable, and output variable. Four can be expressed as a convergent sum of the history structural shocks consequently are: unemployment of t . With the lower triangularity restrictions on shock, a preference shift toward higher fertility, B , we can estimate the reduced form and create a monetary shock, and a Harrod-neutral productivity 0 shock. This structure suggests that the output series moving average representation of the form: are affected by contemporaneous innovations in all 1 series, the money holding variable is affected by all X t B(L) t (3.4) except output, etc. A similar causal ordering without the money holding variable has been justified by with the variance-covariance matrix Wang et al (1994) for the post World War II United 1 1 1 1 States growth model with endogenous fertility. The B0 E(tt)(B0 ) B0 D(B0 ) (3.5) identifying restrictions on involve conditions on the long-run comparative static multipliers. That is, The model (3.4) is just identified. A full-information responses of labor series to fertility, money growth, maximum likelihood estimates of B(L) and D are and productivity shocks, responses of fertility series obtained first by maximizing the likelihood function to money and output shocks, and responses of money with respect to the reduced form parameters, and then holdings to a technology shock are all approximately by using the unique mapping from reduced form zero in the long run. These restrictions are based on parameters the structural parameters are derived. The the following assumptions: a labor supply curve is maximum likelihood parameters are found from vertical in the long run and shifts only by shocks to ordinary least squares regressions of elements on itself; a permanent change in the rate of inflation has their lagged values, and the maximum likelihood no long-run effect on unemployment (a vertical estimate of is obtained from the variance- Phillips curve); fertility choice is unaffected by covariance matrix of the residuals from these monetary disturbance and a Harrod-neutral regressions. productivity shock, and the evolution of real money does not depend on technological shocks. These DATA DESCRIPTION assumptions provide a structure for the initial long- run causal ordering of the system. This empirical study employs Ukraine‘s monthly data covering the period from December 1996 to
NABET Proceedings 2007 4 December 2005. Data on GDP, monetary aggregate where xt is the variable we are testing for M2, and the unemployment rate were obtained from the National Bank of Ukraine (NBU). Data on birth stationarity, xt xt xt1 , and t is the error rates were obtained from the State Statistics term. The hypothesis to be tested is: H 0 : 0 Committee (SSC) of Ukraine. According to the NBU (variable has a unit root), against the alternative : and SSC, the data comply with the International H1 Monetary Fund's Dissemination Standards Bulletin 0 (variable is stationary). Unit root test results Board. are in Table 3.1.
GDP in billion Ukrainian hryvna (UAH) is calculated Table 3.1. Dickey-Fuller Unit Root Test by the income approach. Monthly growth rates of Results GDP and monetary aggregate M2 are determined as a percentage change compared to the corresponding Original In First month of the previous year. The unemployment rate Differences is calculated as a percentage of average annual economically active working age population that is Variable γ τ-ratio γ τ-ratio unemployed and registered with the State U -.004 -1.538 -.305 -4.211 Employment Service of Ukraine. Following Ehrlich and Lui (1991), this study uses the crude birth rate as BR -.002 -0.431 -1.236 -12.289 a proxy of the fertility variable. Crude birth rate is calculated as the number of live births during a given MG -.005 -0.549 -.9369 -9.497 period per 1,000 of population. Ukrainian statistics GDPG -.028 -1.389 -.9608 -9.462 on births cover all residents in both urban and rural areas regardless of their legal status or citizenship, except for refugees who are not permanently settled At the 5% level of significance, the critical value for in the country of asylum. Births from the Ukrainian the Dickey-Fuller test for the sample size of 100 is - citizens that take place on the territories other than 1.95. 2 As long as the absolute values of all test Ukraine are not taken into account. statistics ( -ratio) are less than the critical value, we cannot reject the null hypothesis of the unit root for Preliminary Tests all variables. Provided that the VAR analysis requires
To implement a VAR estimation, the reduced form stationarity of the endogenous variables in X t , the VAR process (3.4) must be covariance stationary1. In next step is to difference the series. The right panel order to check for stationarity of the unemployment of Table 3.1 shows τ –statistics of the Dickey-Fuller rate, crude birth rate, money growth rate, and GDP test in first differences. Given the same critical value growth rate and to determine the order of integration of -1.95 as in the preceding test, we reject the null of these endogenous variables, the Dickey-Fuller test hypothesis of the unit root in first differences and is applied. We let the data generating process to be conclude that all four variables, i.e. the unemployment rate, birth rate, money holdings growth rate, and GDP growth rate are integrated of xt xt1 t , (3.6) order one I(1).
1 The VAR turns out to be covariance stationary if all 1 eigenvalues of B(L) lie inside the unit circle 2 Hamilton (1994), Statistical Table B.6.
NABET Proceedings 2007 5 In addition to stationarity, a VAR requires that there Table 3.2. Results of the Engle-Granger Test for exist no cointegrating relationships among the Cointegration differenced contemporaneous variables of a vector Residuals from the OLS Estimation of a τ-ratio X 3 . We thus follow Engle and Granger (1987) t Two-Variable System methodology, and test the null hypothesis that there is Unemployment Rate on Birth Rate -2.954 no cointegration among the elements of by Unemployment Rate on GDP Growth -2.049 estimating two regressions. The first one fits the Unemployment Rate on Money -3.715 static multivariate model Holdings Growth Birth Rate on GDP Growth -3.357 x1t 1 X 2t t (3.7) Birth Rate on Money Holdings Growth -3.299 where X 2t (x2t ,..., xnt ) , and ( 2 ,... n ) . The second regression is estimated to perform the GDP Growth on Money Holdings -2.580 unit root test: Growth
ˆt ˆt1 ut . (3.8) According to the Engle and Yoo (1987) tables, at the The results of the Engle-Granger test for pair-wise models are in Table 3.2. 1% significance level the critical value is -4.07. Since all -ratios in the estimated pair-wise models in Table 3.2 exceed the critical value, the null hypothesis of no cointegration cannot be rejected for all specifications at the 1% level of significance. Based on these findings, the endogenous vector
is used in the VAR model in the form of first differences of the unemployment rate, crude birth rate, money holdings growth rate, and output growth rate. 3 Engle and Granger (1987) state that if the elements Determination of Lag Length of a vector were cointegrated, then it is not correct to fit a VAR to the differenced data. Based on The number of lags in the VAR model is chosen the differenced data, this conclusion is hard to based on the technique proposed by Sims (1986). It interpret for a real economy. Namely, the long-run uses the likelihood ratio (LHR) test with the null equilibrium relationships among the variables would hypothesis H 0 that p0 lags are sufficient to exist if the variables are cointegrated. To address the describe the dynamics of the model against the problem, Granger (1983) shows that although a VAR in differences is not consistent with a cointegrated alternative hypothesis H1 that p1 lags are system, a VAR in levels could be. However, it would preferable: lead to a new error-correcting representation of the model, and would imply additional restrictions on LHR (T1 C)(ln D0 ln D1 ) , (3.9) the rank of coefficient matrices. With a lower triangularity restriction on a coefficient matrix being where T is a number of observations for the -lag already imposed, Granger justifies the application of 1 the VAR model in differences under a hypothesis that model, C 1 np1 is a correction factor, Di is the there is no cointegrating relationship between determinant of the covariance matrix of the residuals endogenous variables. from the VAR( pi ) system, i=0,1, p1 p0. The
NABET Proceedings 2007 6 magnitude (3.9) is asymptotically 2 distributed deviation shock. The functions also present evidence on the endogeneity of the variable, based on its 2 with n ( p1 p0 ) degrees of freedom, where n is reaction to economic disturbances. Four disturbances the number of variables in the system. As long as a are considered: the unemployment disturbance, the birth of a human being is postponed from the actual birth rate disturbance, the money holdings time the fertility decision was made by the pregnancy disturbance, and the technological disturbance. Since period, only modifications with lags exceeding nine the four-variable vector X t is assumed to be months are considered. Thus, Table 3.3 reports covariance stationary, it is hypothesized that under a computed LHR for the modifications starting with well-specified VAR all shocks will gradually die out p0 10 and p1 p0 1 . in a long run, and the variables will approach a long- run steady state. Thus, a conclusion of endogeneity of Table 3.3. Likelihood Ratio Test for variables in the system will be primarily based on the Determination of the Lag Length impulse responses of variables during a transition process towards the steady state. Lag, T C LogDet months Figure 3.1 plots monthly responses of the 10 97 45 -6.28678 fertility, real money holding, and output growth series to the unemployment shock. 11 96 49 -7.04792 12 95 53 -8.46210 Figure 3.1. Responses to the Unemployment Shock 13 94 57 -9.11953 14 93 61 -9.62384 0.3 15 92 65 -10.93628 0.2
16 91 69 -11.5818 0.1
17 90 73 -12.48869 0 18 89 77 -13.74220 1 2 3 4 5 6 7 8 9 10 11 12 13 14 -0.1
IRF to IRF Unemployment Shock Time, months After eliminating modifications with large LHRs, the -0.2 hypothesis tested is: H 0 : 13 lags are sufficient, Dif BR DifM DifGDPG against the alternative H1 : 15 lags will be The unemployment shock negatively affects the birth preferable. The correction factor is 61. According to rate in a very short run. However, in four months this (3.9), the LHR test statistic is 56.31, which is greater effect becomes positive, which can be explained by than 44, the critical value at the 5% level of the reallocation of time. Namely, a representative 2 significance for the distribution with 32 degrees agent can divide her time between labor, leisure, and of freedom. Thus, we reject the null hypothesis that child rearing. If a household member is unemployed, 13 lags are enough to describe the dynamics of the her time dedicated to family and child rearing system and choose a 15-lag specification. increases. As the plot indicates, the unemployment phase beyond four months in Ukraine speeds up Impulse Response Functions households‘ decisions towards fertility. Twelve months after the shock, the difference in birth rate Impulse response functions (IRF) show how selected approaches its long run steady path. The money variables respond over time to each one-standard
NABET Proceedings 2007 7 growth variable fluctuates in response to the slightly after the fifth month, but the impact defuses unemployment shock in a short run. Sequentially, the within a year. The output growth response to the magnitude of responses decreases, and within a year fertility shock is similar to Wang et al (1994) the effect neutralizes. The sign alteration of the findings: in response to a birth rate disturbance, the output growth adjustments to the unemployment output growth rate accelerates (up to four months). shock might be explained by two effects working in However, later on, the rising birth rate retards capital opposite directions: a negative labor supply effect accumulation and hinders output growth. After and a positive substitution effect. As the fluctuating for a while, the output gradually returns to unemployment shock occurs, the economy still its steady state growth. accelerates with positive differences in output growth. However, with time, the unemployment Figure 3.3 reflects monthly responses of the shock decreases the quantity of labor employed, and unemployment, fertility, and output growth series to consequently reduces the growth rate of output. the monetary disturbance. Then, the substitution effect comes into play. Firms start employing more advanced technology in order Figure 3. 3. Responses to the Monetary Shock to compensate for this reduction, and the economy once again accelerates. 0.13 Figure 3.2 presents monthly responses of the unemployment, money holdings and output growth 0.08 series following the fertility shock. 0.03 Figure 3.2. Responses to the Birth Rate Shock -0.02 1 2 3 4 5 6 7 8 9 10 11 12 13 14
-0.07 Time, months
0.1 IRF to IRF Monetary Disturbance 0.05 -0.12 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 DifU DifBR DifGDPG -0.05 Time, months -0.1 Although the unemployment series reaction to the
IRF to IRF fertility shock monetary shock is minor, the birth rate and the output -0.15 growth series exhibit significant responses. The -0.2 difference in birth rate sharply increases immediately DifU DifM DifGDPG following the monetary disturbance. This tendency The impulse responses of the unemployment series to complies with the Petrucci (2003) conclusion that the fertility shock mimic the responses of the birth fertility growth depends positively on the rate of rate series to the unemployment shock and support growth of money holdings, and that money holdings the proposition of the endogeneity of both variables. are an important determinant of households fertility As theoretically predicted by Petrucci (2003), decisions. The output growth series exhibits responses of the money holdings series to the birth responses to shock that are explained in the following rate disturbance are negative up to five months. way. Initially, a higher money growth speeds up in When a newly born member enters the family, the output growth. But since real money holdings households‘ expenditures significantly increase fall, this, in turn, stimulates fertility and child rearing, affecting the balanced path of money holdings and consequently decreases a labor effort. According accumulation. The money holdings growth vivifies to a modified golden rule that establishes an inverse relationship between capital stock and population
NABET Proceedings 2007 8 growth, higher fertility will bring reduction in per The impulse response analysis suggests the capita output and consumption. As the differences in endogeneity of labor-fertility decisions, income per growth rate diminish to negative values after the third capita growth, and money holdings. If fertility were month following the disturbance, the economy slows exogenous, it would not respond to output, money down gradually. Figure 3.3 predicts that within a year supply, or labor market disturbances. However, as the the effect of the money holdings shock on the output IRFs show, the unemployment shock in transition growth series completely neutralizes4. economy slows down the birth rate in the short run, and positively affects it later on. In the short run, Finally, Figure 3.4 illustrates impulse responses of fertility accelerates with a monetary disturbance in three variables to the technological shock. compliance with Petrucci (2003). On the other hand, impulse responses of fertility to technology shocks Figure 3. 4. Responses to the Technological Shock are ambiguous, with an initial positive response quickly dissipating. 0.05 Variance Decomposition Analysis 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 The variance decomposition shows how much of the -0.05 Time, month forecast error variance for endogenous variables can -0.1 be explained by each disturbance. The econometric
-0.15 results for selected periods are in Table 3.4. IRF to IRF Output Shock
-0.2 Table 3.4. Variance Decomposition DifU DifBR DifM of Forecast Errors Period, S.E. Unemp. Birth Monetary Tech. months Shock Rate Shock Shock With the output disturbance, the unemployment rate Shock responds slightly. This pattern is consistent with the long-run vertical labor supply curve hypothesis. That Variance Decomposition for Unemployment Series is, in the long run, labor supply approaches its 1 0.027 100.00 0.00 0.00 0.00 potential level and the unemployment rate converges to the natural unemployment rate. Responses of the 24 0.059 48.55 21.11 18.12 12.22 birth rate series to the output shock are positive up to Variance Decomposition for Birth Rate Series three months; however, they become ambiguous over time. Figure 3.4 shows that the initial positive 1 0.125 4.16 95.84 0.00 0.00 response of birth rates to the technology shock turns 24 0.240 13.64 51.18 20.63 14.55 into negative in three months, and after changing Variance Decomposition for Money Holdings Series signs over a 13-month-horizon sequentially neutralizes. Impulse responses of the money growth 1 1.789 0.81 2.11 97.08 0.00 series to the technology shock are ambiguous as well. 24 3.240 16.18 13.14 60.53 10.16 Initially, in response to the shock, the money holdings growth decreases. However, it speeds up in Variance Decomposition for Output Series the fourth month. Then, alternating signs in the sixth 1 0.789 17.73 0.80 0.16 81.32 and the ninth month, it either slightly accelerates or slows down. The effect defuses within a year. 24 1.334 18.90 8.3 21.39 51.41
Over a 24-month horizon, the interplay between the real economy and households fertility decisions is 4 Our findings once again lend support to the concept of money neutrality in the long run. significant both in economic and statistical sense.
NABET Proceedings 2007 9 Unemployment shocks account for 13.6% in the hypothesis on the significance of income and money variation of the birth rate series. At the same time, holdings effects in the short-run fertility fluctuations. fertility feeds back into labor market , explaining Table 3.5 reports the results for selected periods. 21.1% in the variance decomposition of the unemployment series With respect to the money The results of the sensitivity analysis can be holdings and the output growth variations, fertility summarized as follows. In general, the differences in shocks amount to 2.1% and 0.8% immediately after the variance decomposition among the original and the disturbance, and 13.1% and 8.3% 24 months two alternative specifications of the model, AM1 and later, respectively. Similar to the impulse response AM2, are minor. Impulse response functions and analysis, variance decomposition lends support to the variance decompositions are qualitatively similar hypothesis that money holdings shocks are important under all orderings, i.e. they both assert an identical for fertility fluctuations. Within a 24-month period, pattern of the adjustments in the movement of they explain up to 20.6% in the birth rate variation. variables toward a steady state. In all cases, the Technology shocks account for 12.2%, 14.6%, and unemployment and the birth rate shocks explain 10.2% in the variance decomposition of almost equal proportions in the variance unemployment, fertility, and money growth series, decomposition of the unemployment series over a 24- respectively. Interestingly that in the variance month horizon, and the contribution of the birth rate decomposition of the birth rate series, the impact of shock is found to be significant. Although the fertility unemployment, money holdings, and output shocks shock covers a major part of the birth rate variations, rises with time, however, the strength of the fertility the money holdings shock explains a fifth of shock diminishes. variations, and is significant at the 2% level in all three specifications. The evidence once again The results of our variance decomposition analysis supports a hypothesis on the importance of real are consistent with the impulse response analysis. money holdings in determining a household‘s labor- The evidence supports two propositions. First, the fertility choice. The variance decomposition of the birth rate series respond to the variations in output growth is not sensitive to the ordering of unemployment and money holdings, which in turn variables, with the birth rate shock explaining explain a significant share in the output growth between 8.0% and 8.6% of the output growth variations. Second, fertility decisions are endogenous variation in the original and two modified models. to the labor market conditions and the monetary side of the economy. Policy Implications
Sensitivity Analysis The results of our empirical study suggest that over different time frames future population dynamics will In order to investigate the robustness of our model have both positive and negative effects on economic application to the Ukrainian economy, two alternative growth in countries with demographic and economics time-series specifications are introduced by changing conditions similar to Ukraine. In the short run, slower the ordering of variables in the original VAR model. population growth will lead to some increase in First, an Alternative Model 1 (AM1) is created. It economic growth by reducing a need to provide new places a fertility time series first in a vector of capital for entrants to the labor force. Recently endogenous variables X. By this operation, we allow increased working age population per se will give the birth rate to affect variations in all time series. additional hands to produce output. At the same time, Second, the trend-stationary fertility variable is transitional economies with falling fertility rates moved to the last position in the system, thus creating confront a long-horizon dilemma: with high death an Alternative Model 2 (AM2). This makes rates and migration outflows, the society is not able deviations in fertility outlying from a trend to be to reproduce itself. Such a society subsequently affected by all disturbances, and permits testing a encounters a problem of a falling fraction of the
NABET Proceedings 2007 10 working age population, and a need to re-allocate the amount of $1700, and an additional monthly resources in support of increasing elderly strata.5 subsidy of $23 for three years.
Policy issues are complex in the light of this However, stimulating fertility purely by economic controversy. If a social planner has an incentive to means might not be a good idea, as it might result in stimulate economic performance in a short run, a moral hazard. Taking into account the average policies oriented on a reduction or postponement of monthly per capita wage of $196 in Ukraine in mid- fertility will be in hand. With respect to the long run, 2006 7 , the above mentioned one-time transfer is the opposite is true. financially significant for low-income households. Monetary incentives can become profit motive for In the East European transition economies fertility poor families. Moreover, some households could issue is important from both the long-run production spend child allowances on other consumption goods and the household welfare points of view. Because and purposes, rather then child care. To address the nursing homes are not well-established and pension issue, the subsidy must take a form of a voucher that payments are insufficient to cover needs of the can be spent only on child care, health, and elderly, these societies rely largely on family support. education, i.e. the improvement of child quality. Contrary to China, where the elder son takes the responsibility, in Eastern Europe usually it is the To this end, we stress the importance of taking daughter who takes care of the elder parents. From quality of children into economic considerations. Yet, this perspective, having a larger family is beneficial. the assistantship for the improvement of child quality has not become a practice in transition economies. Bloom, Canning, and Sevilla (2001) argue that in the Thus, a policy maker can consider a three-level help absence of a demographic dividend, the region is to multi-children families, including child care, likely to be best served by focusing on health and scholarship, and employment opportunity. Along welfare in order to reach a long-term demographic with a child birth allowance, these subsidies can stability. Depending on the objectives, these can be become essential factors in regulation of a socio- family planning programs, social transfers to multi- demographic transition. children families, public investment in education and health, child and maternity labor regulations, and CONCLUSIONS social security programs. Although the modern economic literature is As our empirical investigation confirms, money represented by a vast amount of studies exploring the holdings exert a positive impact on families‘ fertility interplay between fertility and economic growth, decisions. Thus, rising both pensions and child care there are no systematic empirical attempts to assistantship, if accompanied by economic growth, investigate the relationship between households‘ can be an effective mean to smooth the hardship of a fertility decisions, on the one hand, and labor market demo-economic transition. Some changes have conditions, real money balances, and economic already been introduced. For example, a one-time growth, on the other, within multivariate time series transfer equivalent to $300 is offered for a child birth models. For these purposes, we have empirically in Russia, with an additional 18 months child care explored an existing theoretical framework that subsidy of $26 per month. The transfer is supposed to partially ties endogenous fertility and economic increase to $410 in 20076. The Ukrainian government growth through the wealth element or through the offers a one-time transfer for a newly-born child in labor market conditions, by introducing a synthesized
5 Weil (2004) 6 http://www.izvestia.ru/russia/article3094822 7 Source: State Statistics Committee of Ukraine
NABET Proceedings 2007 11 vector autoregressive model on the relationship These may include family planning programs, health between all four variables in transition economy. care policies, compensation, welfare payments, direct subsidies to child birth, labor market regulations, The model has been tested on Ukraine‘s monthly data investment in education, and social security. In from 1996:12 to 2005:12 through the use of a addition, while stimulating fertility with monetary multivariate time series system. With minor means, a social planner must take into consideration quantitative differences in the variance the possibility of a moral hazard operating in decomposition in three alternative specifications, that households‘ decision making. we specify, statistical tests support the hypotheses about significant interactions between A realization that in addition to labor market and the unemployment, fertility, money holdings, and output monetary side of the economy routes fertility and growth series. The impulse response functions show output growth can interact through other channels that all the variables respond to each one-standard offers a wide avenue for further research. As an deviation shock, and that the birth rate is endogenous extension to the VAR model, migration and mortality with regard to these variables. variables can be incorporated. Another open question is to check whether money neutrality holds under Furthermore, the paper demonstrates that demand for introduction of alternative measures of household‘s fertility indeed depends on labor market conditions wealth (i.e. capital accumulation, securities accrual and households‘ financial wealth, and is connected etc). In order to determine whether policy actions with the monetary side of the economy. Firstly, in a have economically and statistically significant effect four-month horizon, unemployment shock causes a on fertility and growth, calibration and simulation of reallocation of time towards child rearing, away from the economy can be conducted under different policy a labor effort, thus inspiring families to increase the scenarios. Finally, the model can be empirically number of children, and retarding production. tested for a broader range of both East and West Secondly, a higher money holdings growth rate European countries with declining fertility. stimulate fertility since, by reducing real money holdings, it diminishes the opportunity cost of an REFERENCES additional child. This, in turn, induces people to increase the number of children, and hence results in Ahituv, A. (2001). Be fruitful or multiply: on the a reduction of per capita consumption and output, and interplay between fertility and economic unambiguously lowers the steady state welfare. The development. Journal of Population Economics, 14, variance decomposition analysis confirms that with 51-71. unemployment disturbances accounting to 13.6%, the monetary incentives explain up to 20.6% of the Barro, R. and Becker, G. (1989). Fertility choice in a fertility variations in the transition economy over a model of economic growth. Econometrica, 57(2), two-year horizon. 481-501
Our findings have important policy implications. In Becker, G. and Barro, R. (1988). A reformulation of transition economies, socio-economic policies the economic theory of fertility, Quarterly Journal of frequently contradict each other, making it difficult to Economics, 103(1), 1-25 reach a common goal of sustainable economic growth with a sound socio-demographic effect. Taking into Becker, G., Murphy, K. and Tamura, R. (1990). account the interdependence among fertility, labor Human capital, fertility, and economic growth, market, economic growth, and the monetary side of Journal of Political Economy, 9(5), 12-37 the economy, a social planner has to implement a multifunctional mix of short-run and long-run Bloom, D., Canning, D. & Sevilla, J. (2001). policies, feasible from the budgetary standpoint. Economic growth and the demographic transition.
NABET Proceedings 2007 12 National Bureau of Economic Research Working Petrucci, A. (2003). Money, endogenous fertility and Paper 8685 economic growth. Journal of Macroeconomics, 25, 527-539 Doepke, M. (2004) Accounting for fertility decline Sims, C. (1986). Are forecasting models usable for during the transition to growth. Journal of Economic policy analysis? Quarterly Review, Federal Reserve Growth, 9 (3), 347-383 Bank of Minneapolis
Ehrlich, I.& Lui, F. (1991). Intergenerational trade, Tamura, R. (2000). Growth, fertility and human longevity, and economic growth. Journal of Political capital: a survey. Spanish Economic Review, 2, 183- Economy, 99(5), 1029-1059 229
Engle, R. and Yoo, B. (1987). Forecasting and testing Wang, P., Yip, C. and Scotese, C. (1994). Fertility in cointegrated systems. Journal of Econometrics, 35, choice and the economic growth: theory and 143-159 evidence. Review of Economics and Statistics, 76 (2), 255-266 Engle, R. and Granger, C. (1987). Cointegration and error correction: representation, estimation, and testing. Econometrica, 55 (2), 251-276 Weil, D. (2004). Economic Growth. Boston, MA: Pearson Addison-Wesley Hamilton, J. (1994). Time Series Analysis. Princeton, NJ: Princeton University Press Yip, C. and Zhang, J. (1996). Population growth and economic growth: reconsideration. Economics Razin, A. and Ben-Zion, U. (1975) An Letters, 52, 319-324 intergenerational model of population growth. American Economic Review, 65(5), 923-933
Svitlana V. Maksymenko is a visiting lecturer at the Department of Economics, University of Pittsburgh. She received her Ph.D. in Economics from Temple University. Ms. Maksymenko has been a holder of a distinguished Edmund Muskie Ph.D. Fellowship (2001-2006). Her research interests are Economics of Development, Demographic Economics, and Economies in Transition.
NABET Proceedings 2007 13
TABLE
Table 3.5. Variance Decomposition of Forecast Errors for the AM1 and AM2
Period S.E. Unemployment Birth Rate Shock Monetary Shock Technology Shock Shock
AM1 AM2 AM1 AM2 AM1 AM2 AM1 AM2
Variance Decomposition for Unemployment Series
1 0.027 95.84 100.00 4.16 0.00 0.00 0.00 0.00 0.00
24 0.059 45.54 48.55 24.12 23.49 18.12 16.59 12.22 11.37
Variance Decomposition for Birth Rate Series
1 0.125 0.00 4.16 100.00 93.03 0.00 2.04 0.00 0.78
24 0.240 11.09 13.64 53.72 49.87 20.63 21.91 14.55 14.58
Variance Decomposition for Money Holdings Series
1 1.789 1.39 0.81 1.53 0.00 97.08 99.19 0.00 0.00
24 3.240 14.86 16.18 14.45 13.99 60.53 59.95 10.16 9.89
Variance Decomposition for Output Series
1 0.789 15.52 17.73 3.00 0.00 0.16 0.27 81.32 82.00
24 1.334 18.62 18.90 8.58 7.97 21.39 22.28 51.41 50.85
NABET Proceedings 2007 14 EDUCATING ENTREPRENEURS: LESSONS FROM THE FINE ARTS James R. Donaldson, Juniata College Karen J. Rosell, Juniata College
ABSTRACT For all practical purposes, the debate over whether entrepreneurship can be taught is over. The growth in entrepreneurship courses, programs, majors and centers is well documented. What, then, are the most useful teaching and learning strategies? This paper will describe some interesting analogies gleaned from the fine arts. It is generally accepted that art historians are better at their work if they have been trained in the studio arts – you can better analyze and come to understand a painting if you know from experience what problems the artist confronted and how those problems were solved. Similarly, there is much evidence to demonstrate that famous artists have studied their predecessors. The artists‘ focus is not on memorizing ―artist, title, date‖ but rather on learning to paint using the expressive styles, the techniques and the materials utilized by that artist. Institutions do not expect undergraduates with degrees in art history to paint like Michelangelo. Neither should we expect undergraduate business students to launch Microsoft or Apple. What we have to decide is whether the entrepreneurial student should study about new ventures or actually undertake new ventures. If we want them to be entrepreneurs, we have to give them the paint, the brushes, and the canvas. At the same time, we have to set expectations. What constitutes clear evidence of progress? This article suggests some answers found in the fine arts.
INTRODUCTION everywhere and look with an entrepreneurial mindset, one that is open to discovery. The headline read, ―Can entrepreneurship be taught?‖ And the subtitle hinted at the answer, ―Classes for Here are five valuable lessons found in the fine arts. would-be entrepreneurs are a hot trend at America‘s Lesson # 1: Help Dali’s find their Vermeer’s universities. But can risk taking and originality be Artists look for inspiration from their predecessors. learned?‖ The Fortune Small Business article went The Surrealists in the early 20th century were on to cite a survey by the Ewing Marion Kauffman challenged when the concepts of space, time and light Foundation that identified 1,992 two- and four-year were being reconsidered in the context of scientific colleges and universities that offer at least one course developments in the Theory of Relativity. Salvador in entrepreneurship. This article recounted some Dali, known for his surreal works like The aspects of the twenty-year-old debate about teaching Persistence of Memory, (figure 1) could have sought entrepreneurship, and it provided some anecdotes photographers whose cameras convincingly captured about students – their passions and accomplishments. time, space and light. It also mentions the successes of highly visible, but largely irrelevant role models (see Lesson # 1 below) such as Mark Cuban, who sold his Broadcast.com to Yahoo! for $6 billion. And there‘s the expected listing of program attributes widely recognized as contributors to student successes – driving past the business plan stage, connections, mentoring, access to capital, and team building. It does seem reasonable to have those attributes in an entrepreneurship program. But if we are to ―teach,‖ especially in the setting of a liberal arts college, are there places to look for inspiration? Yes! Look Figure 1
NABET Proceedings 2007 15 He didn‘t. Instead he found his inspiration in chose this icon, mocking the masterpiece by drawing Vermeer, a Dutch master of the Baroque period. a mustache on a postcard sized replica (figure 3)? Dali‘s favorite painting was Vermeer‘s The The work appeared in the World War I era when Lacemaker (figure 2) from the mid-seventeenth artists asked ―Why bother to make a masterpiece century, a rather small, precisely painted work when in may be destroyed by warfare?‖ featuring a quiet moment frozen in time with a realistic and believable source of light. Vermeer used a device known as the camera obscura. Today he is better known for his Girl with Pearl Earring which was recently made into a feature movie.
Figure 2 Figure 3
The lesson is that business professors have and will Replicating the existing – even if it‘s not a continue to use some ―classic‖ tools of the trade in masterpiece – is an unworthy ambition for student courses for student entrepreneurs – case studies, entrepreneurs. A student in a 100-level meeting practitioners, internships and mentoring. entrepreneurship course once asked, ―Can my term Maybe the learning can come from studying the less project be a business plan to become a franchisee?‖ obvious predecessors, not Bill Gates and Steve Jobs, NO! We need to avoid the formula solutions and at but by helping our young Dali‘s find their Vermeer‘s. the very least tweak the known business models. We do not need another pizza shop in Huntingdon! Be Lesson # 2: Forging a masterpiece is a crime the first person to put a mustache on Mona. Forging Who are the Teenage Mutant Ninja Turtles? a masterpiece is a crime! Michelangelo, Leonardo, Raphael, and Donatello.
Leonardo da Vinci‘s Mona Lisa circa 1485, is arguably the most recognizable image in western art. Is it any wonder then, that the Dada artist Duchamp
NABET Proceedings 2007 16 Lesson # 3: Previewing Picasso’s Portfolio
The name Picasso is sure to conjure up abstract images. Pablo Picasso was schooled in the traditional ways of painting and by the time he was a teenager he created some remarkable pieces of representational art. Art historians like to trace the evolution of an artist‘s style. Even a small sample of Picasso‘s works between 1890 and 1920 demonstrate dramatic changes as he moved into Cubism (see figures 4 through 7).
Figure 4
Figure 5
Figure 6
NABET Proceedings 2007 17
Figure 7
The final sample (figure 8) is mature Cubism and th shows Picasso‘s attempts to capture the 4 Figure 8 dimension, the time-space continuum on a two- dimensional canvas. As Picasso said, ―Learning to In most business curricula, we want to start all our draw like Raphael was easy. It took a lifetime to students at the same point. Indeed, some MBA learn abstraction.‖ programs make a point of that, independent of what an individual already knows or has accomplished. Would it not be more appropriate to examine a student entrepreneur‘s portfolio? In a curriculum where ―doing‖ is the imperative, shouldn‘t we have an appreciation for the student‘s evolution and start him from where he is?
Lesson # 4: Progress may be abstract
In 20th Century Art, students confront Mondrian‘s Composition in Red, Blue and Yellow (figure 9), 1930.
NABET Proceedings 2007 18 Coming closer (figure 11),
Figure 11
Abstracting the tree (figure 12),
Figure 9
Students initially don‘t get it. Their common reaction is ―I could do that.‖ The fact is, they didn‘t; but Mondrian did. How did he get there? In the sequence of his works below, examine the transitions – first, nature from a distance (figure 10),
Figure 12
Simplifying the tree (figure 13),
Figure 10
Figure 13
NABET Proceedings 2007 19 Further simplification (figure 14),
Figure 14
Adding some color and overlapping for an illusion of depth (figure 15), Figure 16 Is it just primary colors, parallel and perpendicular straight lines on a flat canvas? No, it‘s genius! And no, you couldn‘t have done it back then! One develops a much better appreciation when progression is laid out so clearly.
Discrete measurement of student progress as entrepreneurs – looking at just one painting (i.e., the business plan) – may not provide the same insight as the appreciation formed from a longer-term perspective that our colleagues in the fine arts see as routine. Progress might be more abstract than we might at first expect.
Lesson # 5: Transcend the canvas
This next work is by the contemporary artist Frank Stella (figure 17). It‘s one of his earlier pieces. There‘s a sense of frustration exhibited in this work, reflecting his struggle with the limitations of the two- dimensional canvas. Figure 15
And then finally the Composition in Red, Blue and Yellow (figure 16).
NABET Proceedings 2007 20 To Frank Stella, the canvas was a constraint from which he had to free himself. He had to transcend the canvas. That‘s our challenge in ―teaching‖ entrepreneurs.
Academe is loaded with constraints. First and foremost among constraints is the academic calendar that imposes a rigid 15 week discipline, at the end of which professors must submit grades. Lessons # 3 and # 4 above argue that such timelines are capricious, and possibly even counter-productive.
If a student is lucky enough to enroll in a curriculum that provides a sequence of courses, the professor implementing those courses becomes less of an instructor and more of a project manager. It can
become a juggling act far less comfortable than Figure 17 lecturing, class discussions and case studies.
His struggles forced him to leave the two- Most professors prefer (even thrive upon) the control dimensional world and expand into three dimensions afforded by being the expert among the novices. as shown in this later work below (figure 18). The ―Never give up the chalk‖ was a mantra chanted by quote in the corner of the piece states, ―The aim of art the early advocates of the case study method. is to create space in which the subjects can live.‖ In Empowering students to transcend their own the fall 2007, Stella was featured on the CBS Sunday canvases asks the professor to relinquish much of the Morning news program. His studio now is a huge control usually bestowed. warehouse, needed to provide the work space for multiple projects underway simultaneously. While Another constraint can be the quality of students‘ his physically huge works leave the canvas behind, ideas. In the first week of an introductory the use of color and the grid are very reminiscent of entrepreneurship course, asking student to suggest the his earlier work. kinds of businesses they see themselves opening and running usually results in a list like this.
Web design and web site hosting
Sports bar
Campus services (room cleaning, food delivery, etc.)
Rental properties for students
Coffee shop
Yet another pizza shop in Huntingdon
The most insidious constraints are sometimes imposed by well-meaning administrators. Lurking in the recesses of their minds is the notion that the Figure 18 institution has to be in the position to capitalize on any successes that a student may create. It‘s as if
NABET Proceedings 2007 21 administrators expect Bill Gates or some other For help, find a colleague in another discipline and irrelevant model of success (see Lesson # 1) to enroll. explore their world. Institutional policies that insure an equity stake in a student‘s venture ought to be resisted. The REFERENCES educational merits of a program that enables such Ades, Dawn, Dada and Surrealism, in Concepts in student accomplishment should reign. Trust the Modern Art, edited by Nikos Stangos, Thames & successful entrepreneur to do what‘s right by his/her Hudson, Ltd., London, 2001. alma mater. Forbes.com, http://www.forbes.com/entrepreneur. CONCLUSION Gablick, Suzi, Minimalism, in Concepts in Modern Some lessons from the fine arts help us think Art, edited by Nikos Stangos, Thames & Hudson, differently about what we do as professors of Ltd., London, 2001. business. Golding, John, Cubism, in Concepts in Modern Art, Help each student find the appropriate predecessor, edited by Nikos Stangos, Thames & Hudson, Ltd., especially if you have a Salvador Dali. London, 2001.
Resist replicating an existing business model; it‘s not Gray, Patricia, Can entrepreneurship be taught? enough. Fortune Small Business, from CNNMoney.com, March 10, 2006. Determine where each student entrepreneur is along his/her own path. Start him/her from there, not some Morris, Michael, et al., 2001. Toward Integration: arbitrary, universal starting point. Understanding Entrepreneurship through Frameworks, Entrepreneurship and Innovation. Abandon the traditional notions of measuring February 2001, 35-49. progress. Images in this article are used without citation as they Work creatively, even entrepreneurially, within the are readily available in the public domain for constraints imposed. educational, non-commercial purposes. These are just five lessons derived from how colleagues approach their disciplines. There are many more lessons out there waiting to be found.
James R. Donaldson is professor is entrepreneurship and marketing at Juniata College. He received his B.S. from Juniata College, an M.A in economics from the University of Akron, and an M.B.A. from Syracuse University. He survived twelve years of corporate experience in production operations, brand management and strategic planning with Firestone and Questor Corporation before joining academe.
Karen J. Rosell is professor of art history at Juniata College. She received her B.A. in art history and studio arts summa cum laude from The University of Richmond, her M.A. in art history from Virginia Commonwealth University, and her PhD. in comparative arts from Ohio University. She was named the Beachley Distinguished Teaching Professor at Juniata, and in 1995 received The University of Richmond‘s alumni achievement award for excellence in the arts. An accomplished studio artist, Dr. Rosell has produced several commissioned paintings.
NABET Proceedings 2007 22
THE NEED FOR HISPANIC-OWNED BUSINESSES TO TARGET NON-HISPANIC CUSTOMERS, VENDORS AND SERVICE PROVIDERS Roger Hibbs, Kutztown University Scott Schaeffer, Kutztown University SBDC
ABSTRACT
According to the U.S. Census Bureau, Hispanics account for about half of the growth in the U.S population since 2000. Furthermore, the number of Hispanic-owned businesses has increased 82% between 1997 and 2006. The number of Hispanic-owned businesses is growing faster than the Hispanic population. Recently, Hispanic-owned businesses have experienced a decrease in average gross receipts. A review of the literature suggests that this may be related to the growth rate of Hispanic businesses and the tendency of Hispanic-owned businesses to concentrate in Hispanic communities and rely on Latinos both as employees and customers. Hispanic businesses may need to look outside the community for growth opportunities.
BACKGROUND AND STATEMENT accounted for 40 percent of the country‘s population OF THE PROBLEM growth between 1990 and 2000 (U.S. Census, as report by Cohn, 2005). From 2003 to 2004, Hispanics Hispanic-owned businesses are growing faster than accounted for approximately one-half of the 2.9 the general Hispanic population. In addition, sales in million growth rate in national population (U.S. Hispanic-owned businesses decreased by 9% from Census, as report by Bernstein, 2005). 1997 to 2002 (U.S. Census Bureau, 2002). Hispanic businesses tend to be small, family-owned In 2003, Hispanics surpassed African-Americans as businesses. Anecdotal evidence suggests that America's largest minority group. Hispanics have Hispanic businesses source from other Hispanic been reliably projected to grow much faster than businesses and generally appeal to Hispanic African-Americans or any other American group customers. These facts and anecdotal evidence (Etzioni, 2006). By 2000, Hispanics surpassed suggest that Hispanic businesses may be more African-Americans to become largest minority group successful and attract more customers by sourcing in the United States (Etzioni, 2006). By 2050, outside their community and looking to non-Hispanic Hispanics are projected to be 24.3 percent of the customers for growth opportunities. American population. The number of U.S. Hispanic-owned businesses, Despite their geographic concentration, most Latinos along with the U.S. Hispanic population in general, live scattered through neighborhoods where they has grown significantly in recent years. As a result, make up a small share of the population. Some 20 the dynamics of business-to-consumer and business- million Hispanics, approximately 57% of the total, to-business relations has also changed, providing lived in neighborhoods in which they made up less greater opportunities and new threats to new and than half the population at the time of the 2000 existing businesses. census. These Latinos lived in census tracts where, on average, only 7% of residents were Hispanic GROWTH RATE OF THE (Pew, 2005). HISPANIC POPULATION GROWTH RATE OF HISPANIC BUSINESSES, The Hispanic population is 14.2 percent of the total SIZE AND ECONOMIC IMPACT U.S. population; this population is estimated to grow by more than 1.7 million people per year. Hispanics As of 2005, there were more than 25 million are the largest minority in the United States, with an businesses in the United States, constituting an estimated 2004 population of 41.3 million. Hispanics average annual growth rate of around 2% over the
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past ten years. The number of Hispanic-owned In general, start-up firms tend to earn less or have companies has grown 82 percent since 1997, making negative returns in the first few years of operations. them among the fastest-growing business segments in To compound the problem, Hispanic-owned the nation (U.S. Census Bureau, 2002). In 2004, there businesses are highly interdependent, generally were approximately 2 million Hispanic-owned concentrated in Hispanic communities and reliant on businesses in the country that generated almost $300 Latinos both as employees and customers (Pew, billion in annual gross receipts (U.S. Census Bureau, 2005). This recycling of money back into local 2002). By 2010, there will be 3.2 million Hispanic economies can generate growth for Hispanic firms generating $465 billion. This indicates an communities; however this ―greenhouse‖ effect can increase of 60% in Hispanic-owned businesses from be negative during times that the overall economy is 2004 to 2010 (U.S. Census Bureau, 2002). One out of contracting (Pew, 2005). According to Luis Ortiz- every 10 small businesses will be Hispanic by the Franco, Latinos satiate their entrepreneurial spirit by year 2007 (U.S. Census, as reported by Mosher & catering to their own group. He stresses, however, Hausken, 2006). that the Latino link only goes so far. The second part of the equation is having the talent, integrity and Though Hispanic-owned businesses have grown by work ethic to do a good job and keep winning new 82 percent since 1997, there were only 29,168 clients - both Latino and non-Latino (Sterman, 2006). Hispanic-owned firms with receipts of $1 million or more. These firms accounted for 1.9 percent of the For Hispanic-owned businesses to achieve future total number of Hispanic-owned businesses and 62.5 growth and sophistication, they may need to embrace percent of their total receipts. Furthermore, while Ortiz-Franco‘s words and look beyond their overall Hispanic-owned firms constitute 7.0 percent traditional, ethnocentric business practices, and of all U.S. firms, they only account for 2.8 percent of devise strategies to access the expansive growth employees and 2.5 percent of receipts realized by opportunities offered by more established, American businesses (U.S. Census Bureau, 2002). mainstream markets. This would indicate that most Hispanic-owned firms might be limited in their size of operations. BUSINESS LIFE CYCLE, PROLONGED GROWTH AND IMPLICATIONS Additional analysis of Census data is even more FOR HISPANIC BUSINESSES revealing. There was a 31% growth rate in the number of Hispanic businesses between 1997 and Generally, businesses experience four stages of life: 2002 and this was three times the national average for start-up, growth, maturity, and decline. Decline is all businesses (Survey of Business Owners: Hispanic- usually followed by the business closing or being Owned Firms: 2002, as reported by Bergman, 2006). sold. Businesses in the growth phase can often However, during that same period, Hispanic-owned function using their own limited resources. Ideally, business realized only a 19% growth in receipts and during this stage, consumer demand is established an 11% increase in paid employees. Due to the and increases. Additional help is often needed in growth in the number of Hispanic-owned businesses, production, manufacturing, general operations, or the average gross receipts per firm have gone from sales in order to enter the growth phase. The $155,242 in 1997 to $141,063 in 2002, a decrease of company typically experiences increasing sales and 9% over that time period (U.S. Census Bureau, profit margins as the market is penetrated. Mature 2002). Consequently, it is probable that new firms have achieved a certain amount of name Hispanic-owned businesses will cannibalize market recognition. Contacts are well established, sales share from existing Hispanic businesses, inhibiting require less effort, the business produces a reliable the growth potential of many of these established stream of cash, and borrowing becomes easier. At businesses. this point, intensive marketing may be needed to increase or maintain market position, and little
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product innovation occurs. Profit margins tend to to support the sales efforts of these new endeavors. stabilize. Businesses in the declining phase tend to The positioning of the product(s) needs to be experience a shrinking market. There is usually no communicated to a larger market. Future success of product innovation, costs are cut to preserve profits, the business becomes dependent on continued growth and the profits that remain are usually thin. The key through diversification, blending new and existing to growing a business is to understand the market and customers, in combination with blending new and recognize what customers are looking for and existing products and services to create stability as respond to it by developing customer-driven well as growth. More and more customers are processes (Johnson, 2006). obtained by brand awareness, name recognition, and reputation. Reviewing and revising your strategic A bell shaped curve can depict the typical business framework is essential. Most companies that fail do life cycle. The key to prolonging a business‘s so because they do not adapt to changes in their successful life is to reshape the bell curve into an S- marketplace (Buhler, 2001). Most companies never curve by prolonging the growth stage of the business make it to the maturity stage of the business life (Adler, 1997). A key to a business extending its cycle. lifecycle is its ability to create new products and market segments that prolong existing growth stages Managing and prolonging the business life cycle for and enable new growth stages to develop. Hispanic businesses may include expanding into non- Hispanic markets and looking to non-Hispanic The critical point for all new businesses occurs as sources of supply. they try to grow from start-up to maturity. Early in this transition, the company must be constantly RECOMMENDATION FOR nurtured, watched, and guarded. During this stage the FUTURE RESEARCH owner is usually responsible for all business development. There tends to be a feast and famine Research related to the relationship between Hispanic approach to selling. Most new business owners fail to and non-Hispanic markets has focused on how non- think strategically, and are uncomfortable selling. Hispanic owned businesses target Hispanic customers They would prefer to act as an employee of the and utilize Hispanic service providers. In contrast, company, working "in" the business on projects, summations made regarding how small Hispanic- rather than act as an executive of the company owned businesses target non-Hispanic customers and working "on" the business. Face-to-face selling, cold utilize non-Hispanic service providers are generally calling, and networking are usually the only way of an anecdotal nature. There is a need for research companies in this stage can acquire new customers. that investigates the degree to which Hispanic Staying in your comfort zone and not creating a businesses target non-Hispanic customers and utilize framework for the future that includes effective non-Hispanic service providers. As research into selling activities almost always results in failure in business life-cycles indicates, businesses need to this stage (Buhler, 2001). The nature of most target new customers with new or existing products Hispanic-owned businesses (and businesses in and services in order to extend the growth and general) is to remain in their comfort zone and not maturity phase of the business life cycle. If Hispanic realize prolonged growth. businesses continue to grow faster than the growth of the Hispanic population in the U.S., non-Hispanic At this point, successful businesses look to introduce markets may become a key component in their new potential customers to existing products and growth and survival. services. In some cases, new product or service offerings are presented to existing customers as well. Advertising, promotional and public relation tools also must be added to business development activities
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REFERENCES Hibbs, R.D., Sraiheen, A., Martin, D.L., Sable, P.F. The Economic Revitalization of the City of Adler, K.R. & Swiercz, P.M. (1997). Taming the Coatesville, Pennsylvania and SBDC Involvement: A Performance Bell Curve. Training & Development. Developing Model. Alexandria. 51(10) pp. 33-39 Johnson, James, C. (November, 2006) Here‘s to Your Bergman, Mike. (March 21, 2006) Growth of Success. Black Enterprise. Vol. 37. Issue 4. Hispanic-Owned Businesses Triples National Average. U.S. Census Bureau News. U.S. Mosher, Shana. & Hausken, E. (April 4, 2006) 20 Department of Commerce. Washington, D.C CB06- U.S. Hispanic Chambers of Commerce Receive 41. USHCC Foundation CasaCyber Technology Incubator Grants Funded by the AT&T Foundation. Bernstein, Robert. (2005). Hispanic Population USHCC Foundation. AT&T Foundation. Passes 40 Million, Census Bureau Reports. U.S. Census Bureau News. U.S. Department of Pew Research Center (2005) Hispanics: A People in Commerce. Washington, D.C. CB05-77. Motion. Washington, D.C. Trends.
Buhler, Alan. (2001). The Three Stages of Small Sterman, Paul. (April 1, 2004). Latino Entrepreneurs: Business Success. Sales Research and Consulting. An Expanding Population of Businessmen and Consumers Drives Big-Dollar Growth. OC Metro: Cohn, D‘Vera. (2005, June 9). Hispanic Growth The Business Lifestyle Magazine. Surge Fueled By Births in the U.S.. Washington Post. A01. U.S. Census Bureau. (2002). 2002 Economic Census: Survey of Business Owners: Hispanic-Owned Firms: Etzioni, Amitai. (2006). Leaving Race Behind. The 2002. U.S. Department of Commerce. Economic and American Scholar. 75. 20-30. Statistics Administration.
Roger Hibbs, associate professor of management, has taught at Kutztown University of Pennsylvania since 1998. He is a member of the SBDC Advisory Board, ,l,the Professional Development Committee and the Commission on the Status of Minorities.
Scott Schaeffer is employed by the Small Business Development Center of Kutztown University of Pennsylvania.
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ENTREPRENEURSHIP: BUSINESS’S LIBERAL ART Donald Mong, Slippery Rock University
ABSTRACT
The phrases, ―Business,‖ and, ―The Liberal Arts,‖ are seldom uttered in the same breath. Yet, few endeavors challenge the liberally educated mind more fully than Entrepreneurship. To be successful, the entrepreneur must draw upon each of Business‘s own disciplines—Marketing, Management, Accounting, and Finance. (S)he must then inquire into the Social Sciences for the social, economic, and political settings in which the entrepreneurial venture must operate; into the Natural Sciences for the technologies of that venture, and into the Humanities for the entrepreneur‘s personal signature upon the venture. Finally, the entrepreneur must synthesize all of those inquiries into a writing—the business plan—that is so comprehensive, yet so concise, that it triumphs from among the millions competing for professional investors. This paper looks at Entrepreneurship and the Liberal Arts historically, compares the goals and teaching methods of each, and asks whether Entrepreneurship has evolved into,
―Business‘s Liberal Art.‖
INTRODUCTION type of teaching than its historical predecessors, and that the Liberal Arts can offer valuable assistance to This paper traces the relationship between that teaching. Entrepreneurship and the Liberal Arts. The paper attempts to show not only that Entrepreneurship and Section V looks at the central tool in the Liberal Arts are complementary, but that Entrepreneurship teaching, the business plan. The Entrepreneurship itself has now evolved into a section asserts that the business plan must be a multi- parallel Liberal Art. disciplinary synthesis, not a mere technical checklist, and that the Liberal Arts must be an indispensable Section I of the paper asks why the relationship element of that synthesis. should matter. It concludes that, at a time of debate between the relative merits of technically focused Finally, Section VI asks whether Entrepreneurship is Business teaching and broadly focused Liberal Arts not only complementary to the Liberal Arts, but has teaching, Entrepreneurship can be a unifying forum itself evolved to become Business‘s own Liberal Art. for the teaching of both disciplines. SECTION I: DOES THE Section II provides a brief historical perspective on RELATIONSHIP MATTER? the development of Entrepreneurship. It particularly examines the ebb and flow of Entrepreneurship The debate between technical teaching and Liberal through the centuries, until the 1970‘s Heavy Arts teaching has been well documented. (Flannery, Manufacturing Crisis in America. 1998; Hoskins, 1998). This debate continues today, as the need to quickly provide students with Section III provides a parallel historical perspective productive skills, in an increasingly technical world, on the development of the Liberal Arts, tracing it accelerates. Liberal Artists counter that students still from Ancient Greece, through the Enlightenment, need to acquire general skills, such as reflection and and to the modern American university. critical thinking. Entrepreneurship can be a unifying force in the debate, for both the technical and the Section IV looks at the changes that have occurred in Liberal Art are essential to its success. Entrepreneurship since the 1970‘s Heavy Manufacturing Crisis. The section concludes that In Classical times, the forerunners of technical, or modern-day Entrepreneurship calls for a different vocational, teaching were reserved for slaves. The
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forerunners of the Liberal Arts were reserved for free and synthesize those skills needed for a particular men. As the Liberal Arts continued to develop venture. Before (s)he can choose and synthesize the through Medieval and Enlightened Europe, and later correct skill sets, however, the entrepreneur must through America, the distinction between lower-class understand the strategic whole—and that is where the teaching and upper-class teaching continued. Liberal Arts approach can help. The relationship (Flannery, 1998). between Entrepreneurship and the Liberal Arts does matter: It is key to entrepreneurial success. Beginning with the passage of the Morrill Land Grant Acts of 1862 and 1890, technical teaching enjoyed Previous authors have argued for the usefulness of great success in America. Following World War II, the Liberal Arts to Entrepreneurship, and have the GI Bill and changing social perceptions both suggested Liberal Arts courses that budding opened traditional colleges to millions of working- entrepreneurs might find helpful. (Ray, 1990). In class Americans. Now that different social classes this paper, we take a more systemic approach, were attending the same institutions of higher asserting that the holistic nature of Entrepreneurship education, the debate between the relative merits of allows Entrepreneurship itself to be viewed as a type technical and Liberal Arts teaching intensified. of Liberal Art. First, however, we must understand (Hoskins, 1998). Entrepreneurship.
Business Departments have often leaned toward SECTION II: A BRIEF HISTORY OF using available credit-hours to provide students with ENTREPRENEURSHIP as many technical skills as possible. The ―get the job done‖ image of entrepreneurs, in particular, has often It is not the purpose of this paper to provide an led to an assumption that technical, rather than extensive history of either Entrepreneurship or the Liberal Arts teaching, was required. Liberal Arts. Yet, part of the relationship between Entrepreneurship and the Liberal Arts can be traced There is little doubt that Entrepreneurship requires all to parallel histories. Let us therefore briefly look at of the technical skills of the traditional Business how Entrepreneurship developed. curriculum, skills like accounting, finance, management, and marketing. Yet, Entrepreneurship Entrepreneurship is a recent addition to the world of itself is far from a mere collection of technical skills. higher education, gaining most of its current Entrepreneurial success often comes far less from popularity after the 1980‘s. (Kuratko, 2005). There extreme proficiency in any one skill, than from the is a resulting tendency to view Entrepreneurship as a creativity and balance with which the entrepreneur new phenomenon when, in fact, it is the most ancient integrates a wide variety of those skills. form of business. If we understand entrepreneurship to mean the vesting of total managerial control of a Moreover, unless the entrepreneur understand—and venture in an individual, or in a small group of unless Entrepreneurship professors teach—the individuals, then, from ancient times, every self- complex interrelationships among those skills, employed farmer or craftsman was an entrepreneur. students will be ill prepared to find that balance and Entrepreneurship is not new; its popularity has just creativity in their entrepreneurial ventures. ebbed and flowed through the centuries. Fortunately, then, the debate between technical teaching and Liberal Arts teaching can be a short one. As history progressed, certain individuals sought Entrepreneurship itself is a most inclusive discipline, control over vast numbers of other individuals, and, providing fertile ground for teaching both technical at times, they were very successful. Yet, even in skills and Liberal Arts reflection. times of rigid control, such as the Feudalism of the Dark Ages, Entrepreneurship survived. A very few Entrepreneurship is sometimes viewed as a matrix of skilled tradesmen were allowed to manage their own skill sets, from which the entrepreneur much choose ventures. As the Enlightenment arrived to end
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Feudalism, Entrepreneurship expanded. (Walker, We will resume our examination of the development 1999). of Entrepreneurship in Part IV, but, first, let us examine the historical development of the Liberal Entrepreneurship would later find a particular Arts. stronghold in Colonial America. America was to be the embodiment of the Enlightenment, and nothing so SECTION III: A BRIEF HISTORY OF THE defined the enlightened individual as the freedom to LIBERAL ARTS self-manage one‘s affairs. Most went well for American Entrepreneurship through the Industrial The seven traditional Liberal Arts trace their history Revolution. Yet, with the monopolies and from the Classical education of Ancient Greece, oligopolies of the early Twentieth Century, it began particularly from Aristotle. to lose favor. Hierarchical bureaucracy, also known The Trivium, the three subjects of Grammar, as ―corporate management‖ became the system of Rhetoric, and Dialectic (Logic) stood at the core. choice. (Catholic Encyclopedia, 1907). These were the skills Given today‘s connotation of the term, it is hard to of organizing and expressing one‘s thoughts, and of remember that bureaucracy has been implemented acquiring the thoughts of others. Authors have periodically, throughout history, for efficiency in characterized these as the verbal arts, noting that managing large volumes of repetitive functions. For language was the skill needed to acquire all others. instance, the Emperor Claudius instituted it in (Flannery, 1998). Imperial Rome, and Max Weber advocated it in 19th Surrounding the Trivium, was the Quadrivium, the Century Europe. The corporate bureaucratic system numerical arts. These subjects consisted of worked quite well through the first three quarters of Geometry, Arithmetic, Music, and Astronomy. Twentieth-Century America, until the 1970‘s Heavy (Flannery, 1998). Manufacturing Crisis forced a change in thinking. Those four subjects were simply the high-tech skills Entrepreneurship‘s current popularity can be traced of Aristotle‘s day. While more technical in nature to that crisis. Prior to the crisis, Big Business had than the Trivium, the Quadrivium still did not change dominated our economy. The goal had been to start the basic premise of Classical education. Education entrepreneurially, but, then, as soon as possible, to was to be unified whole, not simply a series of become corporate. When the economy changed in subjects. Its value was to come as much from the 1970‘s, however, companies could no longer understanding the interrelationships among the support bloated, sluggish bureaucracies. subjects, as from mastering any one of them. Entrepreneurship proved to be the best antidote, for entrepreneurial companies could be more innovative The truly educated man was then expected to be able and could move more quickly to capture new solve any problem, in any field, merely by reflecting opportunities. upon it. While his technical knowledge of that specific field might be limited initially, his reflection Initially, the Big Business world viewed would quickly establish his analytical path of Entrepreneurship as a synonym for ―small business.‖ solution. Acquiring and applying the technical Soon, however, that world came to recognize that knowledge needed to complete that path would be Entrepreneurship had far less to do with the size of relatively simple from there. the business, than with its management style. Larger businesses, too, could innovate and move quickly if Classical education continued to evolve through they vested total control of ventures in a small group Imperial Rome, and later survived the rigid of managers, rather than requiring those managers to orthodoxy of the Dark Ages. It re-emerged during seek approval from every section of corporate the Enlightenment as the Liberal Arts—the skills that bureaucracy. the liberated man would need to prosper in a world
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suddenly freed of the hierarchies of Medieval first university-level Entrepreneurship course, Feudalism. Without those hierarchies, man would (Kuratko, 2005), the divide between Business need to engage in liberal, or free-form, thinking. education and Liberal Arts education was well established. Like Entrepreneurship, the Liberal Arts became a natural transplant to Colonial America. One then Soon, however, the 1970‘s Heavy Manufacturing might ask why Entrepreneurship and the Liberal Arts Crisis, the DotCom Boom, and the entrepreneurial did not form a closer relationship at that time. The shift in America‘s economy would change the way in answer was elitism. which Entrepreneurship needed to be taught. The Liberal Arts would return, not as an adversary, but as Since Aristotle‘s time, the subjects of what would a necessary complement. become the Liberal Arts had been seen as the skills appropriate to the upper class. In fact, Aristotle Moreover, Entrepreneurship itself would evolve into referred to the Liberal Arts as the Leisure Arts, for it a mirror of the Liberal Arts. The complexity of was only those men of leisure—those whose wealth interrelationships necessary for entrepreneurial and standing freed them of having to earn a living— understanding and the reflective selection of skills who could engage in reflective inquiry. (Flannery, necessary for a given venture, would become the very 1998). embodiment of true liberal education.
Even after the Enlightenment, and even in SECTION IV: MODERN supposedly class-free America, rank mattered. ENTREPRENEURSHIP AND Education was the province of the upper class, and ITS TEACHING NEEDS gentlemen simply did not engage in commerce. They might, and usually did, own the capital of the Until the 1970‘s Heavy Manufacturing Crisis, enterprise, but management was delegated to those of America‘s economy had marched toward Big lower standing. Ben Franklin‘s early years might Business. Since then, it has shifted back toward have been a shining example of Entrepreneurship, but Entrepreneurship. By the 1990‘s, firms with less George Washington‘s approach (ordain the nation, let than 500 employees were producing about half of the someone else manage the whiskey making) was the nation‘s Gross Domestic Product, employing over norm. half of its private work force, and creating the vast majority of its net new jobs. (Kuratko, 2005). It was not until the Great Industrialists of the early Twentieth Century, that commerce became a Yet, important parts of today‘s Entrepreneurship are respectable calling for gentlemen. Those different from its historical predecessors. industrialists suddenly had far more money than the Entrepreneurship education must recognize those old upper class. Just as importantly, World War I differences if it is to adequately prepare the had hastened the breakup of Europe‘s ruling entrepreneurs of tomorrow. aristocracies. That change in social perception Part of that difference lies in the current perception of carried across the Atlantic, and being upper class entrepreneurs. For much of the Twentieth Century, became more about wealth, than about lineage. they were the second-class citizens of the business By that time, however, the Morrill Land Grant Acts world. ―Entrepreneur‖ and, ―small businessman‖ of 1862 and 1890 had expanded technical education. were synonymous. Small businessmen (and they (Chamberlain, 1967; Hawkins, 1998). Thus, when were usually men) were nice to have around, but the great industrialists endowed universities, and were seen as being the folks who pumped gas and did specifically the business schools within those dry cleaning for Corporate America. The best and universities, the preference for the technical brightest of the business world went into Corporate education was pronounced. By 1947, the time of the America. Small business was simply something that
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one did until one could get big, or if one were not collaborators, being well-educated individuals, were good enough to get big. not likely to give up their lucrative jobs with established companies, absent a substantial The 1990‘s DotCom Boom changed that perception. partnership stake in the new entrepreneurial venture. We had known for two decades that entrepreneurial firms were creating most of the net new jobs in the Another reason was cost. Launching a venture had country, (Dennis & Philips, 1999). Now, however, become so expensive, that few individuals could go it with the coming of the DotCom Boom, entrepreneurs alone. Finally, the comfort of having a partner upon were not just providing a nice social service. They which one could depend had become increasingly were also making fortunes in the process. Not since attractive. the Great Industrialists of a century earlier had entrepreneurs held such high standing. The DotCom Today‘s typical entrepreneurial venture has at least Bust of the late 1990‘s did little to dampen that two partners. (Kuratko, 2005). At first, this standing. predominance of partnerships would seem to validate the sufficiency of technical education alone for Yet, the DotCom entrepreneurs were a different entrepreneurs. If multiple partners are running a breed than their Great Industrialist predecessors. The business, then each should be able to focus on his or image of the early 1900‘s was often that of the her own technical area of expertise. uneducated man succeeding through Entrepreneurship. By contrast, some of the best- In reality, however, the very complexity of today‘s known entrepreneurs of the 1990‘s had graduated, or, entrepreneurial ventures makes the Liberal Arts at least, dropped out, from some of the nation‘s elite approach to education all the more valuable. The institutions. The technology needed for modern perceived safety of having partners will be short- entrepreneurial ventures had become so complex, that lived, unless each of those partners is able to look at least some education was needed in their beyond the vast volumes of data in his or her own entrepreneurs. The problem, for the Liberal Arts, technical sector. The more complex that technical was that the DotCom era‘s leading entrepreneurs had sector is, the harder it is to see beyond it. distinctly technical backgrounds. Bray, McClellan, and Useem all studied the progress This perception, that technical education alone was of Liberal Arts majors in the business world. Each the face of entrepreneurship, was furthered by concluded that Liberal Arts majors advanced as well, another subtle change in the image of DotCom if not better, than their non-Liberal-Arts-major entrepreneurs: Teams! counterparts. McClelland, in particular, emphasized the Liberal Artist‘s ability to think creatively and Earlier entrepreneurs had fostered the image of one adapt to new situations. (Management Review, man against the world. (Remember Henry Ford‘s 1984). Perhaps, then, the liberally educated accounting system of lore—cash in one pocket, bills individual‘s true value to the business world, lies in in the other). In the public‘s mind, an entrepreneur his or her ability to see the strategic whole, rather was a single person. If he became successful enough, than just a collection of its components. he retired and hired corporate managers to run the business for him. Whether partner or sole proprietor, few entrepreneurs have the luxury of lingering on any one component of With the coming of the DotCom era, however, teams their venture. Success usually comes from staying of entrepreneurs increasingly predominated. In part, focused on the strategic items—those that can put that team approach was due to the technical one out of business—and understanding just what complexity of the entrepreneurial ventures percentage of one‘s limited time must be devoted to themselves. Collaboration was needed, even to get each of the technical functionalities underneath. In through the prototype stage. The needed
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Entrepreneurship, the business plan is the most triumphs from among the millions competing for commonly used tool to keep that strategic focus. professional investors.
SECTION V: THE BUSINESS PLAN: A The technical complexity of modern entrepreneurial SYNTHESIS, NOT A MERE CHECKLIST ventures requires a Liberal Arts approach in the entrepreneur. The sheer volume of data and the sheer The central tool of Entrepreneurship is the business number of technical functions needed by modern plan. Most entrepreneurs are constantly running entrepreneurial ventures, makes the entrepreneur‘s between the various functions of their venture. For strategic task all the harder. even the best business minds, it is hard, not to become overwhelmed by the crisis-of-the-day. The Strategy means, ―If we get it wrong, we go out of business plan ensures that entrepreneurs look at all of business.‖ Nothing epitomizes strategic choices so the necessary facets of running a business, and that much as the entrepreneurial venture. Entrepreneurs they develop a unified strategy for success. are constantly in danger of going out of business, particularly in the early years. The only hope of not One of the better business-plan outlines lists over 100 going out of business comes from making the correct critical factors which the entrepreneur must address. strategic decisions, almost on a daily basis. In turn, (Entrepreneur‘s Guide: Starting and Growing a the only hope of staying focused on those strategic Business in Pennsylvania, 2003). Each item is decisions, amidst constant distractions from the valid. Unfortunately, far too many completed functional crises-of-the-day, is to understand the business plans are heavy on the checklists, but light venture as a unified network of interrelationships, on the unified strategy. rather than just as a series of technical functions.
Part of the reason is historical. Before the Heavy To understand these interrelationships, one must Manufacturing Crisis, entrepreneurial business reduce the functions to a strategic three: planning was mostly taught in Small Business Administration-type workshops. That approach has Is there a market for what the company wants to sell? haunted Entrepreneurship‘s academic credibility to this day, but, for the simpler ventures of that era, the Within that company, are there the right people, and workshop approach worked well. Even for some of the right product, to capture that market? today‘s simpler ventures, computer-assisted, fill-in- Can the company keep the cash flowing long enough the-blank business plans might be sufficient. Yet, the to grow? majority of today‘s entrepreneurial ventures are more complex, and a different approach is required. Financially, those same three questions become simply: Today‘s best business plans must be models of cross- disciplinary thinking. To be successful, the How much revenue can the company generate? entrepreneur must draw upon each of Business‘s own disciplines—Marketing, Management, Accounting, How much cash will the company have to expend to and Finance. (S)he must then inquire into the Social generate that revenue? Sciences for the social, economic, and political Will the company have enough cash left to grow? settings in which the entrepreneurial venture must operate; into the Natural Sciences for the Other authors might well choose a different technologies of that venture, and into the Humanities expression of the strategic keys for Entrepreneurship. for the entrepreneur‘s personal signature upon the The important point is that Entrepreneurship requires venture. Finally, the entrepreneur must synthesize all a multidisciplinary building from those keys. Unless of those inquiries into a writing—the business plan— each of the functions on the business plan‘s 100+- that is so comprehensive, yet so concise, that it factor checklist furthers a strategic key, then that
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function detracts from, rather than adds to, the Entrepreneurship as a strategic whole, not just a venture‘s value. collection of technical factors. Ignorance of any one of those technical factors can lead to failure, but It is, therefore, not nearly enough to complete a entrepreneurs have little time to linger on any one 100+-factor checklist. The entrepreneur, busy as specific factor. (s)he might be, must devote considerable energy to understanding the interrelationships among both the Thus, the entrepreneur must start from a central business and non-business factors affecting the core—the strategic questions of market, internal success of his or her company. Only then will (s)he people and product, and cash flow. As (s)he expands be able to best choose from the matrix of functional to the more specific factors surrounding that core, skills necessary for a given venture. (s)he must understand the interrelationships of those factors, and weigh the strategic value of each to the In essence, the preceding paragraphs have just central strategy. described the Liberal Arts approach of starting from a central core, emphasizing the interrelationships of the Most of all, the entrepreneur must trust in his or her surrounding subjects, and teaching the unified whole. ability, upon rational reflection, to establish his or her The Liberal Arts approach is clearly complementary own critical path of solution to any problem. This to Entrepreneurship. Yet, educators might further trust stands at the very heart of Entrepreneurship, for, consider whether modern Entrepreneurship has now if the entrepreneur were intimidated by the unknown, evolved into a parallel Liberal Art. (s)he would never start a venture. Needed technical skills can then be acquired along the way. SECTION VI: ENTREPRENEURSHIP: BUSINESS’S LIBERAL ART It was no accident that Entrepreneurship and the Liberal Arts once emerged from the Dark Ages on The history of the Liberal Arts has been one of parallel paths, and that each found favor through grudging expansion, over millennia. The mere much of American history. As each once emerged to expansion from the Trivium to the Quadrivium was provide individuals with the skills needed to prosper controversial for its day. Professors at one university in a world freed of Medieval Feudalism, each should are said to have spent so much time debating the now emerge to provide entrepreneurs with the skills primacy of the Trivium over the Quadrivium, and needed to prosper in a world freed of corporate fussing about into which they should assign each of bureaucracy. the university‘s course offerings, that the townsfolk labeled the whole argument, ―trivial.‖ As today‘s Business curriculum struggles to remain focused on the strategic, while conveying vast Still, the basic tenants of the Liberal Arts education volumes of technical knowledge, and as today‘s have remained the same: One must teach the cross- Liberal Arts struggle to remain relevant in a world disciplinary whole, not just a collection of individual obsessed with that technical knowledge, subjects. One must start from a central core, and Entrepreneurship can be the answer. Is examine the interrelationships among the more Entrepreneurship Business‘s Liberal Art? The author specific subjects surrounding it. Most of all, one believes so, but others might well debate that claim. must trust that the educated individual, upon rational In the end, all that matters is that a Liberal Arts reflection, will be able to establish his or her own approach to teaching Entrepreneurship can produce critical path of solution of any problem. That better entrepreneurs. individual can then acquire and synthesize the needed technical skills along the way. REFERENCES
In essence, the foregoing description works equally Bechard, J.-P. & Gregoire, D. (2005). well for Entrepreneurship. One must teach Entrepreneurship education research revisited: The
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case of higher education. Academy of Management Hoskins, R.L. (1988). A new accreditation problem: Learning & Education, 4(1), 22-43. Defining the liberal arts and sciences. 13pp.
Chamberlain, P.C. & Shilling, R.B. Jr. (1967). Kuratko, D.F. (2005). The emergence of Private liberal arts colleges and their changing entrepreneurship education: development, trends, purposes. Bulletin of the School of Education Indiana and challenges. Entrepreneurship: Theory and University, 43(3), 36pp. Practice, 29(5), 577-597.
Dennis, Jr., W.J. & Philips, B.D. (1994). Small Management Review (1984). In defense of liberal business job creation: The findings and their critics. arts. 73(2), 16. Business Economics, 29(3), 13-22. Pennsylvania Department of Community and DiConti, V.D. (2004). Experiential education in a Economic Development. (2003). Entrepreneur‘s knowledge-based economy: Is it time to reexamine Guide: Starting and Growing a Business in the liberal arts? The Journal of General Education, Pennsylvania. 53(3-4). Ray, D. (1990). Liberal arts for entrepreneurs. The Catholic Encyclopedia Vol. 1 (1907) New York: Entrepreneurship: Theory and Practice, 15(2), 79- Robert Appleton Company. 93.
Flannery, C. (1998). Liberal arts and liberal Walker, L.J. (1999). State control or free market: An education. On Principle, 6(3) 10pp. eternal debate. On Wall Street, 9(1), 107-8.
Hawkins, H. (1998). The making of the liberal arts college identity. Daedalus, 128(1), 1-25.
Donald Mong is an assistant professor of management at Slippery Rock University of Pennsylvania. He received his JD and MBA from the University of Pittsburgh, where he focused on entrepreneurial strategy and closely held companies. Prior to joining academia, he grew small businesses and developed public entrepreneurial policy.
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WE ARE WHO WE MEET Marlene E. Burkhardt, Juniata College
ABSTRACT
Who we are is a function of those around us. Both at work and at play we are influenced by those with whom we interact. People with whom we converse, email, text message, and instant message all play a role in determining who we are. How this influence process takes place is important for us to understand because knowing this can help us control these influence factors in our lives. This paper develops theory and provides empirical support for the role of others in influencing who we are and outlines how we can become more proactive in managing our lives.
Who do you talk to? Who attends that meeting with Let‘s expand beyond the classroom now. Other you? Who is in your cell phone directory? Although interaction partners abound in our lives. Work you may consider the answers to those questions to relationships affect how we think about our job and be rather unimportant, they may actually shape who the technologies that we use and they affect our you are! Understanding why and how we develop behavior on the job, including whether or not we quit. our network of contacts may help us understand the Specifically, some of my research found that importance of ―others‖ around us. individuals adopt similar computer attitudes and computer use as those with whom they interact. A Our perceptions, moods, attitudes, and behaviors separate set of analyses found that individuals who have been shown to be a function of those around us. have similar interaction partners similarly decide to Research has demonstrated that learning may take stay or leave an organization. place by copying the behavior, emotions, and/or attitude of others. We find evidence of this in social The number of contacts we have also matters in our network research and even in neurological research lives! Individuals who have a greater number of on mirror neurons. Therefore, it is likely that students contacts within an organization tend to have greater influence each other in the learning process. influence in that organization. At the same time, on -going research (See Table 1) reveals that following In fact, it has been demonstrated that students in a change in technology, the greater the number of training sessions adopt the attitudes and behaviors of contacts an individual has within an organization, those who are in their class and learn differently than the greater the amount of stress experienced others in a different section but with the same by that individual. So, individuals who interact with instructor and instruction material. While I am not a lot of others are under a great deal more stress than dismissing the importance of individual teaching those who keep to themselves. That should come as behavior, too often classroom dynamics are ignored no surprise! Stress following a technology change and instead we focus on the instructor. Everyone was also found to strongly correlate to job efficacy who teaches knows that the same class can be (negative relationship), power, and motivating different from one semester to another and one potential score. Prior to the technology change, section to another depending on who is in the stress was only related to Motivating Potential Score classroom. So, while we may agonize over (individuals with more complex job characteristics differences in student grades and teacher ratings, are the ones who are stressed). But what is some of it may be out of our control. Blame it on the interesting in additional analyses (See Table 2) is that Registrar‘s Office! there may be some support for the Peter Principle (individuals in an organization rise to their level of incompetence).
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Table 1 - Regression Analysis with Stress are promoted experience a significant increase in as the Dependent Variables stress over time. In other words, is that promotion really worth it?
Independent Variable B t Table 3 - Paul & Mary Principle Means, Standard Deviations & T-Tests for 1. Power .65 2.10* Time 1 & Time 2
2. Job Efficacy -.53 - Stress by Promotion 2.51** 3. Centrality ______4.60 1.65* 4. Motivating Potential No Promotion Promotion Score .41 1.72* (n=35) (n=18) 5. Intercept -.23 -.11 ______* prob < .05, 1 tail M SD M SD ** prob < .01, 1 tail T1 Stress 4.42 1.56 3.90 1.45 F= 5.96, R² = .34, P < .0001 T2 Stress 4.21 1.40 4.39 1.32 Table 2 - Peter Principle t = .85 t = .179 Means, Standard Deviations & T-Tests for Time 1 & Time 2 p = .40 p = <.05, 1 tail Efficacy by Promotion ______Not only does the number of contacts within your No Promotion Promotion organization make a difference but the number of external contacts matters as well. Research has (n=35) (n=18) demonstrated that the greater the number of external ______contacts one has, the more innovative a person tends to be. If one simply focuses on internal contacts, M SD M SD there is greater likelihood for the ―not invented here syndrome.‖ T1 Job Efficacy 5.7 .78 5.73 .84 While most of the above research examined face to T2 Job Efficacy 5.78 .56 5.26 1.07 face contacts, some Juniata students and I were interested in the effects of cell phone and instant t= -.64 t= 2.30 message contacts. We collected data from sports p= .53 p= <.05, 1 tail teams here at the college. Specifically, team members were asked to complete a survey regarding Specifically, it has been found that those who have their cell phone use and attitudes and then to identify been promoted have a significant decrease in job which team members are listed in their cell phone efficacy even one year following promotion. But, a directory and which team members they instant corollary finding (see Table 3), let‘s call it the Paul message (IM). Findings were rather surprising. It and Mary Principle, may be more significant for appears that individual‘s use and attitudes toward cell those considering promotion, namely that those who phones are more similar to those of the persons listed
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in their cell phone directory than those with whom influence than others, the caveat ―all else being they IM. This finding provides support for the belief equal‖ should be kept in mind. For example, we see that there are specific networks of influence that we that as a woman becomes older, she is less likely to attend to depending on the activity or problem at change to become more similar to those around her. hand. So, unless you control for the effects of age, the relationship between gender and social influence may Do I think that we are always influenced by those be unnoticeable. around us to the point of little or no introspection when it comes to decision making? The answer is a There are also ―times in our lives‖ when we are more resounding ―NO!‖ However, there are certain types easily influenced by others. We already addressed of individuals, certain times in our lives, and certain youth. In addition, any time when there is external circumstances which may make us more uncertainty in our lives we tend to be more easily likely to look to those around us to help define our influenced. So, when we are ―new to a job‖ or ―new reality. To begin, the type of individual more likely to a relationship‖ we are more likely to adopt the to be influenced by others (all else being equal) is attitudes and behaviors of others. Uncertainty also generally someone who does not hold strong explains why people adopt the behaviors and convictions, is a high self-monitor, is young, and is attitudes of others following a technological change. female. My father used to say ―if you don‘t stand for On a larger scale, the effects of uncertainty can be something you‘ll stand for anything.‖ This saying is seen when people put aside their differences and a great way to demonstrate that those who hold work together to create a common goal during crises strong conviction are less likely to be influenced by such as a war, environmental disasters, or terrorist others. A variable which addresses the likelihood of threat. All of this is related to our susceptibility to modifying your attitudes or behaviors is self social influence and addresses the fact that in many monitoring. Self-monitoring reflects the degree to ways, ―You are who you meet.‖ which an individual uses cues from social interaction to adjust their attitudes and behaviors. A high self- Knowing that we are a function of those around us monitor is someone who is more likely to adjust their has helped people predict whether employees would behavior in response to such social interaction cues. vote in a union and whether or not new technology is Thus, it is likely that this type of person will adopt likely to be adopted. Looking at an organization‘s attitudes similar to others because in comparison, a social network will allow us to increase the low self-monitor either doesn‘t understand the probability of diffusing new technology, practices, attitudes of others or, perhaps, doesn‘t care! and culture. By selecting individuals who are more Research findings support this conclusion. The central in an organization as change advocates, we saying that ―older people are more set in their ways‖ are more likely to influence the outcome of the also finds some support. Younger people are change process. As an individual, we are more generally more uncertain regarding how they feel likely ourselves to influence others if we interact with about something or how they should react and thus many others or if we have a close friend or associate are more likely to adapt to the views and behaviors of who interacts with many others. Being someone who those around them. You can actually see some is the link between two networks also makes it more evidence of this if you watch young people dancing likely that you will influence others. So, it may when you see them watching and copying the dance beworthwhile to pay attention to your interaction techniques of those around them. Women are also patterns if you would like to influence others. more likely to become more similar to those around It is important to understand the values, moods, and them. Much of this can be explained by the desires of those you spend time with because we have likelihood of women to be more empathic than men. seen that others influence our moods, attitudes, and Of course, many theories abound! Regardless of the behaviors both at work and in our personal lives. reason why some may be more susceptible to social
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Given this fact, we can and perhaps should be Burkhardt, M.E. & G. Miceli, T. Kimmel, J. Leonard, proactive in managing our relationships because W.Russell.(Fall 2006). Which Networks Deternine these in turn may affect who we are. Be careful what Cell Phone Attitudes? Association of Pennsylvania clubs you join, what jobs you take, who you list in Business and Economics Faculties. your cell phone directory, and who you befriend! Contractor, N.S. & E.M. Eisenberg.(1990). REFERENCES Communication Networks and New Media in Organizations. In Janet Fulk & Charles Steinfield Burkhardt, Marlene. (Fall 2005).The Development of (Eds.). Organizations and Communication Similarity in Technology-Related Perceptions and Technology. Newbury Park: Sage. Behaviors among Training Cohorts . Association of Pennsylvania Business and Economics Faculties. Erickson, B.H.(1988). The Relational Basis of Attitudes. In B. Wellman & S. Berkowitz(Eds.). Burkhardt, M.E. (2005). Turnover Following a Social Structure: A Network Approach (pp. 99-121). Technological Change. Computer Science and New York: Cambridge University Press. Information Systems, Part IV: Computer Science Research in Relation to Information Technology and Ramachandran, V.S.(2000) . Mirror Neurons. From Information System, 237-253. www.edge.org/documents/archive/edge69.html
Burkhardt, M.E. (1994). Social Interaction Effects Snyder.(1974). The Self Monitoring of Expressive Following a Technological Change: A Longitudinal Behavior. Journal of Personality and Social Investigation. Academy of Management Journal, 37, Psychology, 30, 526-537. 869-898. Sylwester, R. (2002). Connecting Brain Processes to Burkhardt, M.E. & D.J. Brass.(1990). Changing School Policies and Practices. From Patterns or Patterns of Change: The Effects of a http://www.brainconnection.com/content/181_1/ Change in Technology on Social Network Structure and Power. Administrative Science Quarterly, 35, 104-127.
Dr. Marlene Burkhardt is an associate professor of business administration and information technology at Juniata College in Huntingdon, Pennsylvania. She received her PhD in organizational theory and behavior from Penn State University. Her research interests include studying the diffusion of technology through social networks.
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WEAVING STORYTELLING INTO AN ORGANIZATIONAL BEHAVIOR CURRICULUM: BUILDING COMPETENCIES Joan M. Blewitt, King’s College, McGowan School of Business John J. Ryan, King’s College, McGowan School of Business
ABSTRACT This paper will discuss how the method of using stories/anecdotes was employed to increase student competencies addressed in the business course, Organizational Behavior, during the Spring 2007 semester. Coming from a twenty-five year experience in the field of career planning and job search techniques, this faculty member thought it might be beneficial to draw upon that experience to illustrate or ―bring to life‖ many of the areas included in the organizational behavior curriculum that focus upon abilities, behaviors, attitudes and knowledge that are needed to be an effective business manager. To assess the impact of storytelling as a form of pedagogy to encourage and increase student competencies, a self-perception post-test on the final class day. The assessment results showed statistically significant increases in the following areas: team competency, across culture competency, change competency, ethics competency, communication competency. The competencies and an example of the storytelling methods and their use in the curriculum will be discussed.
INTRODUCTION the instructor and hopefully have a positive impact on the students‘ abilities to recall, retain, and apply the Storytelling has long been used to communicate principles related to these areas. ideas, relate historical events, and provide a moral compass to guide our lives. Whether it be the Using Storytelling as a Teaching Tool parables of the New Testament, or the relaying of some aspect of family history, stories have a way of Storytelling is described as a tradition of using ―sticking‖ with us and thereby allowing us to narrative to develop knowledge (Banks-Wallace, remember certain life lessons or particular points or 1998; Labonte, 1996). For many years educational events. A number of academic disciplines have used leaders, columnists, and non-profit organizations this method to complement their subject matter. have used stories to convey ideas and hopefully have Storytelling is often used in history, philosophy, and them be retained so the message remains. education courses, but seemingly not very Educational research has supported the use of extensively in business curriculums. storytelling as an excellent teaching method (Jacobsen, 2000; Coulter, 2007; Cullen, 2003). This paper will examine the use of storytelling as an Research has shown that stories can be very effective form of pedagogy in the subject matter of powerful. Slater says they have substantial potential the course, ―Organizational Behavior.‖ A standard in to influence behavior. It is difficult to consider nearly every undergraduate business curriculum, another communication genre that can communicate Organizational Behavior is rich in topics such as beliefs, model behavior, teach skills, provide motivation, leadership, teamwork, communication behavioral cues, and simulate consequence of and ethical decision making (Kreitner & Kinicki, behaviors over time in as compelling and involving a 2007; Hellriegel, D. & Slocum, 2007; Robbins & fashion (Slater, 2002). Judge, 2007). Each of these areas have well documented theories interspersed throughout the A report from the National Council of Teachers of curriculum. However, it appears that bringing these English (1997) notes the technique of storytelling as theories to life through the use of storytelling might an unsurpassed tool for teaching students. Through be a method to enhance the teaching capabilities of the use of storytelling, students learn about themselves, about events and information and about
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the thoughts and feelings of others (Kaufman, 1997). succeed and while others fail. Their research While storytelling might be viewed as generally suggests that businesses need to drastically improve entertaining, there are far greater complexities at their messages if they want employees to listen, to work (Clandinin, 2007). understand, care about and remember ideas. The Heaths study how effective ideas are constructed and In addition to the general body of knowledge about delivered. As a result, they spell out six principles at storytelling as an effective teaching tool, there has work when ideas are found to have ―stuck‖. These been some research conducted on the use of include: Simplicity, Unexpectedness, Concreteness, storytelling in the disciplines of social studies, Credibility, Emotions and Stories (Heaths, 2007). mathematics and nutrition. Walker Percy, the These are the common traits possessed by ideas that renowned American novelist, suggested that the use have endured. of storytelling in teaching history is a most effective means of organizing historical information in a way One of these traits, effective storytelling, has the that will bring coherence and interest to history potential for ideas to be understood and remembered instruction (Sanchez & Mills, 2005). Teaching and have a lasting impact. Storytelling far exceeds history in a powerful manner through the use of well- the standard PowerPoint presentation as an effective told and accurate stories is more than entertainment mechanism for getting ideas across and making the (Sanchez, 2005). Additional research on the use of ideas stick. By using the standard presentation styles, storytelling in social studies found that stories may managers may have shared data, but they haven‘t carry important cultural information for the listener created ideas that are useful and lasting. At best, (Sanchez & Mills, 2005). This would suggest that these methods have had minimal impact (Heaths, stories carry messages beyond merely a factual 2007). The Heaths suggest managers use narratives, accounting of historical events. rather than charts and graphs, to put knowledge into a framework that is more lifelike, more true to our The method of storytelling as a teaching tool has also everyday experience (Heaths, 2007). Effective been used in the study of mathematics. Storytelling stories can be very powerful and can provide has been recommended as a way to introduce new stimulation and inspiration, encouraging people to concepts and to work through the solution of act. The Heaths carefully analyze stories and note problems in mathematics (Meel, Gyurko, & Gasper, common themes and plots that are most often used in 2006). Moving to a very different discipline, a study ―effective‖ stories; stories that ―stick‖ (Heaths, of the use of storytelling in teaching nutrition 2007). The goal is to spot the stories that have the described the benefits of using stories by including a potential of having a significant impact on your context through which meaning and connections are audience. The importance of this strategy in business established. Storytelling was found to have a positive is crucial if CEOs & managers want their employees influence on the learning environment (Lordly, to focus on new strategic directives and initiatives for 2007). changing behaviors.
While one might expect to view storytelling as an Applying Storytelling to the effective teaching tool in certain disciplines, it is Organizational Behavior Curriculum encouraging to see that it might have potential in the teaching of business courses. The significant role As educators, we want our ideas to be understood and storytelling can play in corporate communication is remembered and hopefully to have a lasting impact. explored in the newly published book, Made to Stick We try various methods to convey themes, conflicts by Chip and Dan Heath (2007). A professor of and trends, hoping that knowledge is taking place and Organizational Behavior at Stanford, Chip, and his that it will endure once the class is completed. As a brother Dan, who works as a consultant for Duke teacher of Organizational Behavior, I have explored Corporate Education, set out to study why some ideas ways to draw from my previous experience as a director of career services to enhance my teaching
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skills and to promote learning among our students. New York City. With housing and expenses a major The experience of working with employers as they concern, he felt confident he could complete this attempted to fill positions and students as they chose unpaid internship because he had an aunt who lived career paths has created a rich ―bank‖ of stories from in New York City and she had offered to host him for which to draw upon to enhance the curriculum, and the summer. His outstanding grades and abilities hopefully try to bring the theories and models noted during the interview process, ―landed‖ him the discussed to life. It is also hoped that these stories internship. will ―stick,‖ and thus improve the students‘ retention of topic areas/theories in the Organizational Behavior All was well until the week before the internship was curriculum. to begin when Mark traveled from his home in Pittston, Pennsylvania to confirm his living As topic areas in the curriculum lend themselves to arrangements. To his surprise, his aunt had only a what I viewed as related narratives, I used small efficiency apartment. While his aunt storytelling as a form of pedagogy to enhance student graciously offered Mark the couch, or a small cot, he learning and meet the learning objectives for the felt she would have almost no privacy and neither course. Storytelling is more than entertainment in would he. Mark faced a major ethical dilemma. He this Organizational Behavior class. These are real, had given the brokerage firm his word on completing true stories about students and graduates who have the internship and he was determined not to back out many characteristics in common. The students relate of the commitment. He was aware that the brokerage to the subjects of these stories and vicariously firm had already enrolled him in their training class. experience the situations and challenges they faced. With limited financial means, paying for a hotel or It is anticipated that these stories provide simulation any kind of room arrangement was out of the (knowledge about how to act) and inspiration question. (motivation to act). The opportunity to vicariously live through someone‘s challenge or problem can Putting his cognitive and creative powers to work, help us anticipate appropriate responses to future Mark figured out a way to fulfill his eight week situations. Mental practice alone improves our internship commitment. He lived at home in Pittston, performance significantly (Heaths, 2007). Stories put Pennsylvania, awoke at 4:30 a.m. each morning to knowledge into a framework that is more lifelike and dress and drive to Scranton, Pennsylvania where he true to our everyday experiences. took the 5:20 a.m. bus to New York City so he could make the subway connection and be at work by 8:00 A Sample Story from the a.m. He did the reverse each night, leaving the city at Organizational Behavior Course 4:30 and taking the subway to the bus station and then getting home at around 7:00 p.m. He used his The curriculum of Organizational Behavior is filled savings to pay for the bus fare, his parents helped to with topics that lend themselves well to storytelling. pay for his subway rides, and he worked as a caddy One of the areas that is discussed and studied is every weekend to make up the difference in what he ethical decision making. After reviewing the various would have normally earned over the summer. He principles of ethical decision making, using the had ―double-bagged‖ caddied every chance he could standard teaching techniques of lecture, questioning to make the most money possible every weekend. and discusson, I have incorporated a story into this topic area. The story follows. After a very successful internship, Mark was offered a job by the brokerage firm, but ultimately turned it A commuter student and junior finance major at down. Many of the employers with whom he later King‘s College, Mark, was academically outstanding interviewed asked about how he was able to complete and also very career minded. In preparation for the an unpaid internship in New York City. After summer before his senior year, he worked diligently interviewing Mark, several employers said they to secure an internship with a major brokerage firm in
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wanted to hire ―the guy who rode the bus.‖ He had Cultures Competency, Change Competency, Ethics four offers from which to choose when he graduated. Competency and Communication Competency. He selected an outstanding company and when I TABLE 1 asked him what the deciding factor was in making his Results of Exploratory Factor Analysis selection, he said it was the mission statement and the for Student Core Competencies ethical standards of the company that made him sure FACTORa that this was the best placement for him.
Rich in detail, and very relatable to the students in Items 1 2 3 4 5 Specific Abilities / this class, the story carries home the message of staying true to one‘s word and behaving in an ethical Behaviors: manner. While it pales in comparison to the renown Presents written examples of Enron & Tyco, when discussing the materials clearly -.004 .071 .117 .116 .892 importance of ethical behavior, this story speaks and concisely. Listens actively and volumes about motivation, commitment and .306 .042 .089 .391 .782 non-judgmentally. fortitude. As the story is told and unfolds during the Consistently avoids Organizational Behavior class, the non-verbal pressures from behavior of the students hearing the story is very others to engage in -.088 .229 .221 .775 .189 interesting. They are clearly engaged and unethical conduct. anticipating the sequence of events. The story is then Sets clear used to reflect back on the principles of ethics expectations of previously discussed. The telling and discussion of ethical behavior and this story serves to reinforce ideas that were regularly reinforces .523 -.243 .027 .776 -.001 discussed in the lecture environment earlier. If there this expectation was a follow-up three months from now, my thoughts with others. are that the students may not remember the names of Learns from those the ethical principles, but they will remember the with different story and hopefully what it was attempting to convey. cultural .250 -.153 .054 .787 .331 backgrounds. In other words, it will ―stick.‖ Detects and ASSESSMENT understands others‘ .468 .024 .261 .746 .301 values, motives, and Method emotions. In an effort to assess the effectiveness of storytelling Encourages and as a pedagogy, I used a simple form of assessment. supports creativity .207 -.299 .859 .079 .116 At the beginning of the Spring 2007 semester, I gave in teams. a short pre-test, a modified version of an experiential Learn, share, and exercise on Self-Competency found in Hellriegel & applies new Slocum‘s book, Organizational Behavior (2007) to knowledge to improve a team, .073 -.500 .700 -.059 .405 assess students‘ self rated core competencies in department, or several areas. I administered the post-test at the end whole organization. of the semester. Understands how Results various organiza- tional designs can Table 1 reports the results of exploratory factor be used to bring .204 -.331 .823 .266 .092 analysis (using both VARIMAX and OBLIQUE about successful rotations) on the five proposed student foundation change. competencies scales of: Team Competency, Across
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Items 1 2 3 4 5 Factor Competency Titles are: Specific Abilities / 1 = Teams; 2 = Across Cultures; 3 = Change;
Behaviors: 4 = Ethics; 5 = Communication. Knows what cultures have the All eighteen items loaded on their a priori expectation that hypothesized factors and satisfied the following individuals are to .334 -.866 -.041 .075 -.124 conditions: Kaiser (1970) criterion of retaining take care of factors with Eigen values greater than one; the scale themselves. items had a factor loading of at least .50; the Possess firsthand difference between factor cross-loadings was greater knowledge that than .20; and each factor was represented by at least different cultures two items (Ford, MacCallum & Trait, 1986; Van are risk averse and .348 -.842 .353 -.066 .053 Dyne, Graham & Dienesch, 1994). The items in each use rules to mini- dimension were summed and averaged to provide mize trying to deal with uncertainty. five scores for each of the student competency Knows how mas- dimensions. Table 2 shows the results of the pre/post culinity and femi- scores for each of the five student foundation ninity in different competencies. societies affect -.090 -.788 .393 -.180 .136 interpersonal TABLE 2 relationships. Pre-Post Test of Student Core Competencies Works effectively Pre-test Post-test with people from different cultures Student Mean SD Mean SD t_value who value unequal .275 -.862 .455 .067 .046 Competency: distribution of power in society. 1. Team Knows how to diag- Competency .180 -.843 .301 .124 -.132 8.01 1.11 8.56 .92 3.74*** nose firm‘s culture. Works effectively .886 -.122 .110 .204 .039 2. Across in team situations. Cultures Encourage teams to Competency 6.94 1.27 7.88 .1.22 3.80*** celebrate .766 -.148 .409 .404 .308 accomplishments. 3. Change Observes dynamics Competency when working with 7.32 1.63 8.31 1.03 3.46*** groups and raises .856 -.344 .033 .113 .007 relevant issues for 4. Ethics discussion. Competency Promotes teamwork 8.27 .89 8.69 .83 3.45** among groups, discourages ―we vs. .936 -.259 .178 .335 .215 5. they‖ thinking. Communication 7.62 1.33 8.31 1.00 3.69** Note. Listwise deletion was used to handle missing competency data, n = 39. a * p < 0.05; ** p < 0.01; *** p < 0.001 Boldface indicates primary factor loadings; loadings n = 39 of at least .50 and the difference between cross- loadings greater .2.
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All five student foundation competencies show supports storytelling-as-pedagogy as an effective statistically significant increases from beginning of methodology (Coulter, 2007). Success in enhancing semester scores to end of semester scores. students‘ skills in (1) Teamwork Competency; (2) Across Cultures Competency; (3) Change In addition to the pre and post assessments, student Competency; (4) Ethics Competency and (5) feedback was gained through several means. Often Communication Competency. In addition to the pre students referenced the storytelling examples as they and post assessment data, the comments made by wrote their examination essays throughout the students and the overall rating of teacher semester. In addition, about half of the students who effectiveness seem to support these findings of the wrote comments on the ―Student Evaluation of usefulness of this teaching technique. By reinforcing Teaching‖ for the Spring 2007 semester mentioned the theories and information presented with ―real the positive use of storytelling as a teaching life‖ accounts, the concepts became more personally technique. The following comments were taken from relevant to the students. Based upon the insights the evaluation questionnaire item: ―To help your gained from this assessment, a narrative approach learning, what is one specific thing from the course enhanced teacher-effectiveness resulting in increased you think was most helpful, and why? student competencies in the areas discussed.
―The teacher‘s teaching skills were the most helpful While this assessment has proven helpful to the part of the course.‖ instructor in confirming the value of storytelling in the Organizational Behavior curriculum, there are ―Understanding behavior in industry at a practical clear limitations to this study. Other forms of level.‖ pedagogy are at work in any course and it is difficult ―Enjoy the ―real life‖ examples.‖ to limit the results to an assessment of this method alone. Future research should attempt to determine ―Most helpful-examples.‖ the increase in student skills in these areas in a classroom environment in which storytelling did not ―The examples given that were related to real life play a role. The Heaths have researched the experience.‖ effectiveness of relying on narrative to make ideas ―I learned a lot through personal stories.‖ ―stick.‖ It would be helpful to assess whether or not these stories and their related concepts ―stuck‖ by ―Great teaching method which helped in learning the conducting follow-up surveys several months after material.‖ the course was completed.
―Likes how examples relate to the text.‖ It might also be interesting to explore how this technique might be used in other areas of business ―Relates material to real life situations.‖ curriculums in higher education. College professors might want to explore the storytelling-as-pedagogy These comments and evaluations would suggest that technique to enhance the classroom environment, the use of storytelling as a teaching technique was contribute to the acquisition of student learning and well-received by students. extend beyond the ―snooze factor‖ often associated DISCUSSION with PowerPoint presentations.
The use of storytelling was in part a response to REFERENCES blend career-related experiences gained from a Banks-Wallace, J. 1998. Emancipating potential of former administrative role with the theoretical storytelling in a group. J. Nurs Scholarship 30(1), 7- constructs in various areas of the course 21. Organizational Behavior. The assessment feedback
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Clandinin, D.J., Pushor, D., & Orr, A. 2007. Krietner, R. & Kinichi, A. 2007. Organizational Navigating sites for narrative inquiry. Journal of Behavior. New York: McGraw-Hill/Irwin. Teacher Education, 58(1), 21-35. Labonte, R., Feather, J. 1996. Health Canada. Coulter, C., Michael, C., & Poyner, L. 2007. Handbook on using stories in health promotion Storytelling as pedagogy: An unexpected outcome of practice. Ottawa, Canada: Ministre of Supply & narrative history. Curriculum Inquiry, 37(2), 103- Services. 122. Lordly, Daphne. 2007. Once upon a Cullen, E.T. 2003. Tell me a story: Using narrative time……Storytelling to enhance teaching and to teach safety to skilled blue-collar workers. learning. Canadian Journal of Diatetic Practice and Spokane Research Lab, National Institute for Research, 68(1), 30. Occupational Safety and Health, Centers for Disease Control and Prevention. Meel, D., Gyurko, D., Gasper, M. 2006. A little- used act of teaching: The case of storytelling. Ford, J., MacCullum, R. & Tait, M. 1986. The Mathematics Teacher, 100(1), 64-68. application of exploratory factor analysis in applied psychology: A critical review and analysis. Personnel Robbins, S. & Judge, T. 2007. Organizational th Psychology, 39, 291-313. Behavior. 12 Edition. New Jersey: Pearson Education. Heath, C. & Heath, D. 2007. Made to stick: Why some ideas survive and others die. New York: Sanchez, T. 2005. The story of the Boston Random House. Massacre: A storytelling opportunity for character education. Social Studies, 96(6): 265-269. Hellriegel, D., & Slocum, J. 2007. Organizational Behavior. 11th Edition. Mason, Ohio: Thomson Sanchez, T. & Mills, R. 2005. Telling tales: The South-Western. teaching of American history through storytelling. Social Education, 69(5), 269-274. Jacobsen, M. 2000. Excellent teaching and early adopters of instructional technology. Educational Slater, M.D. 2002. Entertainment education and the Media 2000 World Conference on Educational persuasive impact of narratives. In T. Brock, J. J. Multimedia/Hypermedia and Educational Strange, & M. C. Green (editors), Narrative impact: Telecommunications. Montreal, Quebec, Canada. Social and cognitive foundations. Hills-date, New Jersey: Erlbaum. Kaiser, H. 1970. A second generation little-jeffy. Psychometrika, 35, 401-415. VanDyne, L., Graham, J.W., & Dienesch, R.M. 1994. Organizational citizenship behavior: Construct Kaufman, Felice. 1997. Teaching storytelling: redefinition, measurement, and validation. Academy Teaching ideas and topics. National Council of of Management Journal, 37, 765-802. Teachers of English, Urbana, Illinois.
Joan M. Blewitt is a professor of business administration in the McGowan School of Business at King‘s College in Wilkes-Barre, Pennsylvania. She received her Ph.D. in Organizational Leadership from the University of Pennsylvania. She was previously the Director of Career Planning and Placement at King‘s College. Her other research interests are in business ethics and experiential learning for business students.
John J. Ryan, C.S.C. is a professor of business administration in the McGowan School of Business and the Director of the McGowan School of Business at King‘s College in Wilkes-Barre. Pennsylvania. He received his Ph.D. in Business Administration from Temple University. His other research interests are in organizational behavior, business ethics and the use of business advisory groups.
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A STUDY OF ADVISING RESOURCES PERCEIVED BY FIRST-YEAR STUDENTS AND TRANSFER STUDENTS Margaretha Hsu, Shippensburg University of Pennsylvania April Bailey, Shippensburg University of Pennsylvania
ABSTRACT
A survey was distributed to students in the Foundations of Business Administration course (FBA) over a period of three semesters. The FBA course is the College of Business‘s core class that is required for all business majors and is the equivalent to many institutions‘ first-year seminar courses. In an attempt to obtain more accurate information, questionnaires were completed anonymously. Students used a Likert scale to evaluate available resources such as their academic advisor, course instructors, staffs, catalog, friends, parents, and the FBA class.
This paper examines the perceptions of both first-year and transfer students on various academic advising resources, and gives educational implications. The age of the 512 respondents ranges from seventeen to forty. For the purpose of this study, only those who are younger than twenty-four were selected. The final sample sizes were 75 transfer students and 315 first-year students.
It was found that a significantly higher percentage of transfer students had declared a major than first-year students who had declared a major. Interestingly, first-year students, in general, had a more favorable view of advising resources. In addition, the percentage of students who were transfers strongly agreed or agreed that their academic advisor was willing to answer questions was significantly lower than first-year students who responded similarly. Also, this study found that the FBA course was much more effective in advising freshman than transfer students.
INTRODUCTION universities and colleges have developed programs for their incoming and current students assist with Good academic advising is the vital connection their career goals and the courses needed to reach between students becoming successful with their those goals. academic choices. Students who are not able to have such an experience may not graduate on time or may To better advise students, the College of Business not have had the chance to make a meaningful (CoB) faculty developed a first-year seminar course, learning experience from their college endeavor. Foundations of Business Administration (FBA). The Hunter and White (2004) state that ―academic FBA is a 1-credit interdisciplinary course designed advising, well developed and appropriately accessed, with the following four objectives, which have been is perhaps the only structured campus endeavor that organized to benefit the student‘s development in the can guarantee students sustained interaction with a course and also to meet the standards of The caring and concerned adult who can help them shape Association to Advance Collegiate Schools of such an experience‖ (p. 21). Business (AACSB):
Hunter and White (2004) believe that providing • to provide students with an opportunity to effective advising information is more relevant and investigate their goals, interests, skills, and abilities they affirm that ―the challenge is to create an so that they can make informed choices and meet academic advising system that students, faculty, and their personal goals through a meaningful university administration view as essential, not peripheral, to the experience. educational experience‖ (p. 21). Therefore, many
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• to begin the integration process by providing a center, career development, study abroad program platform on which to build student understanding of along with campus clubs and organizations. the different functional areas in business, how they work in concert for the benefit of the organization, It is essential that students adjust to their college and how this breadth of knowledge will benefit environment and the literature shows that the sooner students in working toward and meeting their goals. students become more connected to their university and academic programs, they will have higher rates • to provide exposure to a breadth of university of succeeding, and lower rates of attrition. (Astin experiences, both educational and extracurricular, 1993; Pascarella & Terenzini 1991; Tinto 1975, and to suggest ways in which students can make 1993). these experiences work together toward accomplishing their goals. In this study, questionnaires were completed anonymously and students used a Likert scale to • to provide exposure for students regarding possible evaluate their views on academic resources, such as careers in business (Hsu & Bailey, 2007; Marsh & their academic advisor, course instructors, Stone, 2004) department staff, university catalog, friends, parents, and the FBA course. We obtain the perceptions of Student preparation of a 4-year study plan is a major transfer students and first-year students on how requirement for successfully passing the course. This willing their advisors were to answer questions. 4-year study plan includes the student‘s personal Ultimately, we were looking to compare goals and outlines major course work, general characteristics of these two groups of students and education requirements, and free electives the student found some interesting findings. intends to take. Each student works in class with the instructor to develop his or her personalized 4-year METHOD study plan before scheduling classes. The student also discusses the study plan with her or his advisor. A survey was taken in FBA classes during three For successful completion of this course, students consecutive semesters: spring 2006, fall 2006, and rely heavily on the support of faculty advisors (Hsu spring 2007. The questionnaire was designed to & Bailey, 2007). Additionally, students are required assess students‘ views of several advising resources to attend one business club meetings coordinated by such as, advisors, course instructors, department individual majors. These activities give students staff, friends and parents as well as the university opportunities to interact with other students and catalog and the FBA course. A total of 99 transfer understand the course requirements as well as the students and 320 freshmen participated. Out of 99 potential career path for the particular major. transfer students, there were 12 freshmen, and several students were older than twenty-three years of age. The FBA course was designed to assist students with Because the goal of this study is to investigate the a successful transition from high school to college by differences in perceived helpfulness by transfer encouraging them to be actively involved with their students and freshman concerning several advising academic advisors and to have developed resources, the authors believe that students who were relationships with other students and faculty older than twenty-three years of age might have a members. Through the FBA course, students are complete different needs and perceptions concerning introduced and encouraged to use various advising advising resources and thus were excluded from the resources such as academic advisors, staff members, study. To avoid double counting, those 12 friends, parents, course instructors, and the university transferred freshmen were included in the group of catalog (Hsu & Bailey, 2007). Also, the course freshman. Therefore, a total of 75 transfer students transitions freshman students and transfer students to and 315 freshmen were included in this study. the CoB by orienting them to college norms, required coursework, available resources such as a counseling
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Of the transfer students 36% were sophomore, 62.7% influences on freshman than they did for transfer were junior and 1.3% was senior. Also, this group students. Freshmen also placed friends and parents consists of 68% male and 32% female, and 93.3% of as more important advising resources than their them had declared a major. Management was the counterparts. A higher percentage of freshman most popular major for transfer students. Data also students, in comparison to transfer students, strongly showed that 45.9% of transfer students resided on agreed or agreed that the University catalog was campus, 44.6% lived off campus, and 9.5% lived at helpful. home. When asked about the willingness of the advisors to For the freshman group 62.9% were male and 37.1% discuss the study plan, 71.6% of the transfer students were female. In addition, 78.7% had declared a major strongly agreed or agreed, 79.6% of the freshman and accounting was the most popular major for this held the same opinion. Furthermore, 77% of the group of students. Vast majority of freshmen were transfer students feel that their advisors were willing required to live on campus. As a result, data indicated to answer questions, while 84.1% of the freshmen felt 92.2% lived on campus, 2.3% were off campus, and the same way. Regarding the study plan, 94% of the 5.5% lived at home. freshmen and 85.3% of the transfer students strongly agreed or agreed that it was helpful. RESULTS Data based on t-tests suggested that gender affects Table 1 shows the comparisons of views on various student‘s view on the helpfulness of some advising advising resources between transfer students and resources such as advisor, catalog, and study plan for freshmen. Both groups considered FBA the most the freshman group. Male students felt the helpful advising resource. Transfer students ranked University catalog and study plan were more helpful advisor second which were followed by course while female students felt that their advisor was more instructors, friends, catalog, staff and then parents, helpful than their counterparts in this group. while freshmen ranked course instructors second However, gender played no significant role on followed by friends, catalog, advisor, parents and transfer student‘s perceptions of advising resources. then staff. Also, the percentages of students who strongly agreed or agreed about the usefulness of CONCLUSION these advising resources were generally lower for transfer students than those for freshmen. In this study we surveyed students‘ views on the usefulness of academic resources provided by their Table 1: Percentages of Students Strong Agree or academic advisor, course instructors, department Agree That These Advising Resources Are Useful staff, university catalog, friends, parents, and the FBA course. It was found that a significantly higher FBA Staffs Instructors Friends percentage of transfer students (93.3%) had declared Transfer 79.7 60.0 76.0 70.7 a major than first-year students (78.7%) who had Students Freshmen 93.0 54.6 90.1 78.7 declared a major. Interestingly, first-year students, in general, had a more favorable view of advising Advisor Catalog Parents resources. In addition, the percentage of students Transfer 76.0 69.3 50.7 who were transfers strongly agreed or agreed that Students their academic advisor was willing to answer Freshmen 77.5 78.1 58.7 questions were significantly lower than first-year Freshmen had more positive views about advising students who responded similarly. First-year students resources except staff. A significantly higher (94%) stated that the 4-year curriculum plan was percentage of freshman than transfer students felt that helpful compared to (85.3%) of the transfer students. the study plan in the FBA course is helpful. In Also, gender is a factor on students‘ perceptions on addition, course instructors had significantly stronger advisor, catalog and study plan for freshmen but not
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for transfer students. In addition, this study found Hsu, M., & Bailey, A. E. (2007). Academic advising that the FBA course was much more effective in as perceived by business students. NACADA, 27 (1), advising freshman than transfer students. Finally, 39-45. more than 50% of students in both groups felt all of the advising resources considered were helpful. Hunter, M. S., & White, E. R. (2004, March-April). Could fixing academic advising fix higher education. REFERENCES About Campus, 20–25.
Astin, A. W. (1993). What matters in college: Four Marsh, M., & Stone, S. (2004). A model for teaching critical years revisited. San Francisco: Jossey- Bass. integration of business disciplines to freshman business majors. Journal of College Teaching and Astin, A. W. (1999a). Involvement in learning Learning, 1(1), 23-34. revisited: Lessons we have learned. Journal of College Student Development, 40(5), 587–99. Pascarella, E. T., & Terenzini, P. T. (1991). How Retrieved February 19, 2006, from ProQuest college affects students. San Francisco: Jossey-Bass. database. Tinto, V. (1993). Leaving college (2nd ed.). Chicago: Astin, A. W. (1999b). Student involvement: A University of Chicago Press. developmental theory for higher education. Journal of College Student Development, 40(5), 518–30. Retrieved February 19, 2006, from the ProQuest database.
Margaretha Hsu, PhD, is professor of the Department of Finance and Information Management & Analysis at Shippensburg University where she teaches both business statistics and data-mining courses. Her research interests are mostly in the areas of applied statistics. She can be reached at [email protected].
April Bailey is an assistant professor in the John L. Grove College of Business. Ms. Bailey received her MBA from Shippensburg University, and is currently ABD at The Pennsylvania State University, University Park, PA. Her research interests are the adult students and understanding more about first-year students‘ transition to college. She can be reached at [email protected].
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DO YOU SEE WHAT I SEE? DESIRED LEARNING OUTCOMES AND ACHIEVED LEARNING OUTCOMES IN INTERNATIONAL STRATEGIC ALLIANCE Stevenx. Si, Bloomsburg University Minuddin Afza, Bloomsburg University
ABSTRACT
A large number of American firms currently entering International Joint Ventures (IJVs) in China are pursuing long- term strategic success that requires a successful organizational learning from both sides to achieve the goals for each partner of IJVs. This study investigated learning goals with two levels: desired level and achieved level and hypothesized that Chinese and American partners in Sino-American IJVs have different learning goal priorities and evaluations of the success of their learning goal achievement. This study also measured learning success for each partner of the IJV with a two level model.
INTRODUCTION knowledge bases through exposure and access to their partner‘s knowledge and society adoption Because of substantial potential benefits, Sino- process (Si & Bruton, 1999). Though profuse and American International Joint Ventures (IJVs) are an rich, the organizational learning literature has not attractive option. However, views regarding the greatly addressed issues of success in learning efforts success of Sino-American IJVs are diverse. For of Sino-American IJVs. Likewise, the equally example, some suggest that dissatisfaction with IJV profuse and rich IJV literature offers very limited economic performance has made many American understanding of Sino-American IJV success and the partners lose patience with IJV formation and achievement of the IJV objectives based on IJV operation in the People's Republic of China (e.g., learning perspectives. Thus, important questions Beamish, 1993, Si & Hitt, 2004). Yet, official fitting the case of Sino-American IJVs on more Chinese statistics show slightly continuous growth in specific but crucial dimensions such as Sino- Sino-American JVs after China becomes a member American IJVs‘ learning success remains of World Trade Organization (WTO). Chinese unanswered. governments also report that majority of Fortune 500 U.S multinational companies has invested in China, In this research we investigate the important and and the U.S. still is the leading foreign investor in the achievement dimensions of organizational learning in Chinese market (Si & Bruton, 2005). This suggests Sino-American IJVs. Specifically, to enhance our that, despite problems, U.S. firms continue to see vast understanding of organizational learning potential in the Sino-American IJV. Given this performance, we explore differences in how Chinese potential, deeper understanding the underpinnings of and U.S. IJV partners prioritize learning objectives. the success and failure of Sino-American IJVs may We also explore how they differ in their evaluations be crucial. of the achievement of learning objectives.
A number of researchers suggest that knowledge LITERATURE REVIEW AND HYPOTHESES learning objectives play a central role in IJV formation (e.g., Hamel 1991; Kogut 1988; Lyles & Researchers and theorists suggest numerous Salk 1996; Inkpen & Beamish 1997; Si & Bruton, motivations for IJV formation. For example, 2005). Among the numerous other advantages, IJV‘s Harrigan (1985) suggested reasons such as provide an excellent means for organizational uncertainty reduction; resource acquisition under learning. Firms in IJVs expand and acquire conditions of market failure; information exchange; competitor preemption; defensive action; synergy
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exploitation; technology transfer; and diversification. management practices, and acquisition of new Similarly, Contractor & Lorange (1988) indicated knowledge becomes a more important goal for many that IJV formation can generate a variety of benefits Chinese firms. Therefore, both partners of a Sino- through achieving at least seven overlapping American IJV have many opportunities and objectives. These objectives are: 1) risk reduction; 2) motivation to learn in this emerging business economies of scale and/or rationalization; 3) environment. technology exchanges; 4) co-opting or blocking competition; 5) overcoming government-mandated Learning in IJVs can involve migratory knowledge or trade or investment barriers; 6) facilitating initial embedded knowledge. Migratory knowledge international expansion of inexperienced firms; and consists of explicit knowledge specific to a task, 7) vertical quasi-integration advantages of linking the procedure, or information base (e.g., Badaracco, complementary contributions of the partners in a 1991). Embedded knowledge is more tacit and less value chain. Although there are numerous reasons directly observable. It involves knowledge of for forming IJVs, organizational learning is a key managerial, administrative, operating procedures. objective identified consistently in the literature (e.g., Companies in IJVs acquire migratory knowledge Lyles 1996; Makino & Delios 1996). For instance, from grafting, a learning process whereby a link with Kogut (1988) summarized the motivations for another company provides a firm access to the forming a joint venture under three considerations: knowledge not previously available within the transaction costs reduction (cost economizing); company (Huber 1991). Since embedded knowledge strategic behavior (competitive positioning); and is more difficult to observe from outside of a firm, organizational learning (knowledge transfer). IJVs provide companies opportunities to learn tacit knowledge. Working with other companies, firms Organizational learning is the development of learn by doing, observing, and generally becoming insights, knowledge, and associations between past emerged in other firms‘ practices and operational and actions, the effectiveness of those action, and future administrative procedures (e.g., Huber 1991; Miner actions (Fiol and Lyles 1985). Organizational and Mezias 1996). learning differs from individual learning. In contrast to individual learning, organizational learning entails For our purposes, the IJV learning could involve learning at a collective level. Organizational learning either type of learning process. Our research begins with the individuals who make up the questions involve the performance of the IJV on the collective (Dodgson, 1993). However, to become dimension of organizational learning. We need not organizational, knowledge acquired by individuals is make a distinction in the type of knowledge or transformed to a property of the collective (Spender, knowledge acquisition processes. Our focus on the 1996). The knowledge must be shared and become accomplishment of learning objectives as defined by stored in the organizational through the firms themselves. Thus, a company may seek institutionalization in the organization‘s culture or both embedded and migratory knowledge. more formal storage systems (e.g., SOPs). Teagarden Definition of Learning Success (1990) noted that China is currently undergoing what may be the most radical social experiment of our How to define learning success? Daft (1995) time, a gargantuan modernization program of renewal reported that the mission of an organization is to and reform. If new knowledge is a source of unique pursue and achieve goals. The articulated goals are resources and sustainable competitive advantage, important to knowledge acquisition in shared then knowledge of a potential vast market such as management IJV ( Lyles & Salk 1996). In the China‘s is attractive to many U.S. firms. Similarly, current study, we define learning success as the after becoming a member of WTO, Chinese firms are degree that one organization achieved its‘ goal (Si & now facing a new situation that they need to more Bruton, 2005). We also noticed that IJV learning directly compete worldwide with modern technology, success is often reflected in a set of goals rather than
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any single goal. For instance, Anderson (1990) of organization. For example, the Chinese IJV reported that IJV learning could be predicted by partner is more likely to be satisfied with the partial following five learning goals: (1) understanding a fulfillment of its goal of gaining new technology (Li, new market; (2) learning a new technology; (3) 1994). Thus it is possible that each partner in Sino- developing new management techniques; (4) American IJVs may has different evaluations of the developing innovative technologies; (5) and successful learning goal achievement. Again, indeed, generating other potential opportunities. Dymsza the assessment of goal achievement is quite (1988) argued that an IJV's learning success must be subjectively associated with the separate evaluation assessed through the fulfillment of a number of level for goal achievement and perceptions of diverse goals from each of the partners. Thus, as learning success of each partner. Hence: with most strategic objectives (Connolly, Conlon and Deutsch 1980), there is no single indicator of Hypothesis 2: Chinese and American partners in successful learning. Consistent with this view, our Sino-American IJVs have different evaluations of the interviews with managers in the preliminary states of success of their learning goal achievement. this research, found that IJV partners often had METHODOLOGY different objectives regarding learning in the IJV. Regarding the reasons leading to the different sets of To explore goals defining learning success and to goal priorities, we argue that the fundamental provide a basis for its measurement, the current study differences in the Chinese and American national devoted much effort to generating a list of contexts may be a key influence in the partners‘ measurable goals for IJV learning success. Two prioritization of IJV learning goals because the major steps were employed as described in the national context represents the immediate following sections. environment where each firm competes (Porter, 1990). Damiels, Krug and Nigh (1985) surveyed Generation of Learning Goals American partners and indicated that Chinese The first step was to generate as many learning companies have chosen IJV as opposed to other success goals as possible from a review of the forms of business operations for two main reasons: relevant literature and the relevant empirical study better access to technology and better access to results. Both Western sources (Dymsza, 1988; foreign market. In addition, Mead (1994) stated that Anderson, 1990; Lyles, 1988; Daniels, Krug & Nigh, these IJV partners' goals are largely determined by 1985; Beamish, 1993; Davidson, 1987; Teagarden & their parent firms' specific mission or purpose and Von Glinow, 1990; Shenkar, 1990; Yan & Gray, desired future state. Thus, since no two parent firms 1994; Tan & Litschert, 1994; Luthans, Rubach & are the same, each IJV goal can be reasonably Marsnik, 1995), and the writings of Chinese IJV hypothesized as having different weights with each experts (i.e., Hu, 1989; Wu, 1992; Pan & Wilfried, partner of the Sino-American IJVs. Hence: 1993; Li, 1994; Osland & Cavusgil, 1996) were Hypothesis 1: Chinese and American partners in reviewed. Nineteen learning goals emerged from this Sino-American IJVs have different learning goal review. priorities based on a variety of existing differences between two countries. Refinement of Learning Goals To refine these goals and reduce the number of goals In addition, our interviews with managers in the to a smaller, more manageable set, a total of 38 preliminary states of this research reveal some experts (21 Chinese and 17 American) of Sino- differences of each partner‘s criteria to evaluate the American IJVs were interviewed. These experts achievement of the IJV learning goals. Such included 21 business faculties and 17 consultants, difference may stem from differences in the they all have at least years' experience with Sino- economic factors, cultural factors and many aspects American IJVs. These personal interviews were
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respectively conducted in June of 1997 and in March was sent to all IJVs emphasizing the importance of a of 1998 in Shanghai China and in the California and timely reply and expressing appreciation. This data Washington State of America by the authors of this collection method was suggested by Dillman (1978). paper. In addition to more generally discussions concerning learning goals, each interviewee was Individual high-level managers of IJVs were targeted asked to evaluate the set of goals developed from the as the best qualified key informants. The results literature review and to rate them on an eight-point indicated that about 18% of the respondents were scale, where 1=least important and 8=most important. presidents or vice presidents, another 60% were Based on the interviews and survey information, we senior managers, and remaining 22% were middle- reduced our set of goals and listed them in order of level managers. The final sample consisted of 148 importance to the following: 1) learning more about respondents, including 74 American managers and 74 the partner firm‘s national culture; 2) gaining Chinese managers. The response rate was about knowledge of market characteristics; 3) learning 76%. Returned questionnaires did not have serious government policies, rules and relevant laws; 4) missing data problems. Only about 13 questionnaires learning the negotiation styles of the partner; 5) did not respond to all questions. When data were gaining labor resources; 6) gaining capital resources; missing, average values for the item replaced the 7) learning new technologies; 8) gaining knowledge missing response. This treatment of missing data was of new managerial types and styles; 9) understanding suggested by Cohen and Cohen (1983). In general, the partner‘s political and economic systems. the current study met traditional requirements regarding the data quality and sample size and Data and Sample representiveness. It include a suitable sample size of qualified respondents and a high response rate, both In the current study, 110 IJVs were randomly of which make it likely to produce valid and reliable selected from a total of 547 Sino-American IJVs in results (Lockhart and Russo, 1994) for IJVs in the the Shanghai area as of 1996 (Directory of Shanghai economy. Information in Shanghai Foreign Investment Enterprises edited by Shanghai Government, 1996). Measures Because prior researchers found that performance may vary with age and size of an IJV (Anderson, To derive the measure of learning success, the current 1990; Zeira and Shenkar, 1990). We moved IJVs study utilized recent research that examines less than two years old and with fewer than 50 performance from the member's perspective (Parkhe, employees. This reduced the sample to 98. Most 1993; Olk, 1996). In this study, responding IJVs in the final sample were established by well- companies were asked to weight various performance known and large-sized Chinese and U.S. companies. achievements in terms of their own goal criteria and The IJVs represented diverse industries. The to evaluate the joint venture on these criteria. The companies participating in the study were promised weighted values were summed to derive a single confidentiality. measure of performance.
Data were collected through a mail survey to 98 In the current study, the participants were asked to Sino-American IJVs. The original mailing contained rate on an eight point scale (1=least important; two copies of the questionnaire, one version in 8=most important) for evaluating the importance to Chinese and one in English. Each was accompanied the company of each of the nine learning goals in the by personalized cover letters and directions for Sino-American IJVs in the Shanghai. The current completion. A request was made to ask high-level study also asked the participants to rate the extent of Chinese managers and high-level American managers goal achievement in each of these same nine learning to fill out the questionnaire. Five days after initial goals on the eight point scale. To compute the mailing of questionnaire packets, a follow-up card variable for weighted learning success, each rating of goal importance was multiplied by each goal
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achievement. The total was then summed for an to 6.00 and the standard deviations ranged from .57 overall measure of learning success weighted by each to 3.98 pertaining to the importance of learning goals. company's individual learning preferences. This The results also revealed that the means ranged from method differs from the method of simply summing 4.21 to 5.14 and standard deviations ranged from .06 goal achievement to obtain a single-scale result. It to 2.95 pertaining to the achievement of learning provides weights on the relationship between a goals. learning goal importance and its priority for a more unique way to measure the weighted learning success TABLE 1 of Sino-American IJVs. Means, SD of Learning Goals All scales in the current questionnaire were reviewed Importance in the IJVs by two nationally recognized scholars who have done Learning Goals Mean S.D. Rank widespread study in the area of Sino-American comparative management. Gaining labor resources 4.33 3.69 5
Questionnaire Design Gaining capital 3.88 3.61 8 resources Questionnaire in the current study measured the importance and achievement of the learning goals in Learning new 4.14 3.98 7 the Sino-American IJVs. The alpha for the technologies importance scale was .68 and for the achievement scale was .75. The two sections included the nine Gaining knowledge of 4.30 2.88 6 primary learning success goals. The main purpose in new managerial types designing the two sections was to test the different and styles learning goal priorities in the Sino-American IJVs. The English-version draft questionnaire was sent to Gaining knowledge of 5.65 2.06 2 three nationally recognized American scholars who market characteristics have done extensive studies and consultation in the Learning government 4.60 2.95 3 area of Sino-American IJVs. Based on feedback policies, from these Sino-American experts, the questionnaire rules & relevant laws was revised several times to better fit current Sino- American IJV realities and to remain reasonably Learning more about 6.00 .57 1 consistent with instruments designed by other the partner researchers who conducted similar studies. firm‘s national culture
The questionnaire included English and Chinese Understanding the 3.75 1.63 9 versions. To minimize potential bias caused by partner‘s cultural and linguistic differences, the Chinese economic systems version was back-translated into English by different bilingual scholars and vice versa. This technique is Learning the 4.49 1.82 4 standard in cross-cultural studies (e.g., Werner & negotiation Campbell, 1970; Si & Cullen, 1998). styles of the partner
Findings and Discussions * A eight-point scale was used in the survey with the following anchors: The means and standard deviations for the study's nine learning goals are presented. The results in 1=least important; 8=most important these tables revealed that the means ranged from 3.75 * The rank was based on the item‘s mean
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TABLE 2 TABLE 3
Means, SD of Means of Learning Goals Importance Learning Goals Achievement in the IJVs Means of Importance Learning Goals Mean S.D. Rank Learning Goals China USA p- Gaining labor resources 4.21 2.95 9 values Gaining labor 1.81 6.84 P ** Gaining capital resources 5.01 2.74 4 resources Learning new technologies 5.31 2.51 1 Gaining capital 6.71P 1.05 ** Gaining knowledge of new 4.44 .06 7 resources managerial types and styles Learning new 7.24 P 1.03 ** Gaining knowledge of market 5.14 .09 2 technologies characteristics Gaining knowledge 5.71 P 2.89 ** Learning government 4.65 1.17 6 of new managerial policies, types and styles rules & relevant laws Gaining knowledge 4.91 6.39 P ** Learning more about the 4.95 .47 5 of market partner characteristics firm‘s national culture Learning government 3.14 6.06 P ** Understanding the partner‘s 5.10 1.47 3 policies, rules & economic systems relevant laws
P P Learning the negotiation 4.28 1.28 2 Learning more about 5.99 6.01 n.s. styles of the partner the partner firm‘s national culture * A eight-point scale was used in the survey with the following anchors: Understanding the 2.39 5.11 ** partner‘s economic 1=least important; 8=most important systems
* The rank was based on the item‘s mean Learning the 3.01 5.97 ** negotiation The above findings indicated that only small styles of the partner differences existed among means when large differences existed among standard deviations * p < .05 regarding the importance and achievement of these learning goals in the Sino-American IJVs. ** p < .01
P In contrast, the comparative results between China : Priority and US samples regarding the importance/achievement of the learning goals revealed significant differences.
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TABLE 4 achieving most learning goals can be attributed almost wholly to the lowest priority learning goals. Means of Learning Goals Achievement In addition, the finding that goal priorities of IJV Means of partners differed not only provided support for Achievement Hypothesis 1 but, also, offered information for a Learning Goals China USA t- possible in-depth analysis of the relationship between values learning goals and learning success in Sino-American IJVs. Specifically, for instance, prior studies reported that the main task the Chinese firm joining Gaining labor resources 3.44 4.97 ** with foreign companies was to obtain capital resources from those companies (Ike & Chen, 1987; Gaining capital resources 5.68 4.34 ** Pomfret, 1991; Thoburn, Chan & Tang, 1990). The Learning new technologies 5.35 4.28 ** initial tentative conclusion roughly accorded with the following statement: since the communism or former Gaining knowledge of new 4.45 4.43 n.s. communism country economic system was in terrible managerial types and styles economic disarray, the IJVs on the Chinese side ought to have treated capital resources as a first Gaining knowledge of 5.25 5.03 n.s. priority. However, the results of this study revealed market characteristics that the Chinese IJV partners seemed reasonably satisfied with the partial fulfillment of their learning Learning government 4.56 4.75 n.s. goal of gaining capital resources, especially when policies, rules & relevant compared with their other prioritized learning goals. laws While this finding might surprise some Americans, it Learning more about the 4.89 5.01 n.s. can perhaps be better understood by examining the partner firm‘s national larger picture. In terms of sheer capital investment, culture Hong Kong and Taiwan were by far the largest investors in the Chinese market (The Bulletin of the Understanding the partner‘s 3.77 5.43 ** Ministry of Foreign Trade and Economic economic systems Cooperation of the People's Republic of China, 1996; The Bulletin of the State Bureau of Business Learning the negotiation 3.62 4.94 ** Administration of the People's Republic of China, styles of the partner 1996, Joint Venture Section). Their supply of capital resources made China fundamentally different from * p < .05 the other developing countries, whether capitalist, ** p < .01 socialist, communist, or former-communist.
Clearly, the findings presented in Table 3 and 4 In regard to the evaluation differences in Hypothesis strongly supported hypotheses 1 and 2. The findings 2, it might stem from differences in parent firms' in Table 3 and 4 also indicated that Chinese IJV goals, organizational structures, cultural factors, and managers prioritize the learning goals 2,3,4,and 7 many other aspects of organization. Fuller when American IJV managers prioritize the learning exploration of such differences might well lead to goals 1,5,6, and 7. Again, the findings revealed that, innovative IJV management models: for instance, in general, both Chinese and American IJV partners how can IJV management models best combine the are relatively unsuccessful in achieving their higher- strengths of American individualism and Chinese priority learning goals. Ironically, the success at collectivism? Such differences have always faced Sino-American IJVs on a daily basis. It may be
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possible to find ways to make the differences work Contractor, F. J. & P. Lorange. 1988. Why should for the benefit of IJV operations. firms cooperate? In Contractor & Lorange, editors, Cooperative strategy in international business. In conclusion, this study investigated learning goals Lexington, MA: Lexington Books, 3-28. and measured learning success through the methodology of evaluating the relationship between Daft, R. L. 1995. Organization theory and design the learning goals‘ importance and learning goals‘ (fifth edition). St. Paul: West Publishing Company. achievement. Among the most readily meaningful findings of this study were: (1) the isolation and Daniels, John D., Jeffrey Krug, & Douglas Nigh. definition of a set of Sino-American IJV learning 1985. U.S. joint ventures in China: Motivation and goals; (2) an innovative measurement of learning management of political risk. California success for the Sino-American IJVs. The further Management Review. 27: 46-58. studies will expand sample size and the number of Davidson, W. H., 1987. Creating and managing joint IJV locations, and do further cross-checking results ventures in China. California Management Review, through the use of multiple methodologies for further 29: 77-94. clarification of the issue of strategic learning success in the Sino-American IJVs. Dillman, D. 1978. Mail and telephone surveys: The total design method. New York: John Wiley and REFERENCES Sons, Inc. Anderson, E., 1990. Two firms, one frontier: on Directory of Information in Shanghai Foreign assessing joint venture performance. Sloan Investment Enterprises, 1995 (edited by Shanghai Management Review, 31(2): 19-30. Government). Badaracco, Joseph, L. Jr., 1991. Alliances speed Dodgson, J. S. and Mark, 1993. Organizational knowledge transfer. Planning- Review. 19: 10- Learning: A review of some literatures. 16. Organizational Study, 14: 375-394. Beamish, P. W., 1993. The characteristics of joint Dymsza, William A. 1988. Successes and failures of ventures in the People's Republic of China. Journal joint ventures in developing countries: Lessons from of International Marketing, 2: 28-43. experience. In Contractor & Lorange, editors, The Bulletin of the Ministry of Foreign Trade and Cooperative Strategy in International Business, Economic Cooperation of the People's Republic of Lexington, MA: Lexington Books, 384-403. China, 1996, 2: 9-10. Eriksson, K., Johanson, J., Majkgard, A. & Sharma, The Bulletin of the State Bureau of Business D. D., 1997. Experiential knowledge and cost in the Administration of the People's Republic of China, internationalization process. Journal of International 1996, Joint Venture Section. Business Studies, (special issue): Second quarter, 337-360. Cohen, J. & P. Cohen, 1983. Applied Multiple Regression/Correlation Analysis for the Behavioral Fiol, C. M., and Lyles, M. A. 1985. Organizational Sciences. Hillsdale, New Jersey: Lawrence Erlbaum. Learning. Academy of Management Review, 10, 803- 813. Connolly, T., E. J. Conlon, & S. J. Deutsch. 1980. Organization Effectiveness: A Multiple-Constituency Hamel, G., 1991. Competition for competence and Approach. Academy of Management Review, 5: 211- interpartner learning within international strategic 17. alliances. Strategic Management Journal, 12 (special issue-summer), pp. 83-103.
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Harrigan, K. R., 1985. Strategies for Joint Ventures. Mead, R., 1994. International management: Cross Lexington, Mass: Lexington Books. cultural dimensions. Cambridge, Massachusetts: Blackwell Publishers. Hu, Re-Wen, 1989. The performance and problems of current IJVs in Shanghai area. Research Project of Miner, A. S. and Mezias, S. J., 1996. Ugly ducking Shanghai Local Government. no more: pasts and futures of organizational learning research. Organization Science, 7: 88-99. Huber, R. F., 1991. Mercedes manufacturing strategy is to keep the company‘s market niche full. Olk. P. 1996. The effects of partner differences on Production, 103: 60-63. the performance of R & D consortia. Working paper.
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Steven X. Si is a professor of management at Bloomsburg University Of Pennsylvania.
Minuddin Afza is a professor of management at Bloomsburg University Of Pennsylvania.
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A COMPARISON OF THREE ASSESSMENT TOOLS FOR BUSINESS SCHOOLS Carolyn LaMacchia. Bloomsburg University of Pennsylvania Carl J. Chimi, Bloomsburg University of Pennsylvania David Martin, Bloomsburg University of Pennsylvania
ABSTRACT
This paper examines the forces that drive the assessment of academic programs, with a focus on business programs. After examining the literature, it compares three commercially available tests along the dimensions of Target Audience, Areas of Testing, Skills, Knowledge Base, Application, Value Added, Ownership of Results, When Administered, and Costs.
INTRODUCTION student learning rather than teaching, per se. The issue of assessment of student learning has leapt Professional educators have responded to faculty to the foreground this past year with the publication concerns that students are not demonstrating of A Test of Leadership: Charting the Future of U.S. competencies that one would expect of college Higher Education published by the U.S. Department graduates – especially in the soft skills such as of Education‘s Commission on the Future of Higher effective communications, team building, critical Education (commonly referred to as the Spellings thinking etc. Also, business educators recognize that Commission after U.S. Department of Education employers are often not satisfied with the ability of Secretary Margaret Spellings). While tackling issues graduates to exhibit professional competencies as as diverse as financial aid and access, a major thrust well. of the report concerned itself with student learning. In addition, regional accreditation agencies such as The Commission was disturbed by the lack of The Middle States Commission on Higher Education emphasis that Colleges and Universities have placed (Middle-States) (2005) require in their standards that on student learning: assessment be conducted by their member As other nations rapidly improve their higher institutions: education systems, we are disturbed by evidence that Effective assessment processes are useful, cost- the quality of student learning at U.S. colleges and effective, reasonably accurate and truthful, carefully universities is inadequate and, in some cases, planned, and organized, systematic, and sustainable. declining. A number of recent studies highlight the shortcomings of postsecondary institutions in 1. Useful assessment processes help faculty and staff everything from graduation rates and time to degree make appropriate decisions about improving to learning outcomes and even core literacy skills. programs and services, developing goals and plans, According to the most recent National Assessment of and making resource allocations. Because Adult Literacy, for instance, the percentage of college institutions, their students, and their environments are graduates deemed proficient in prose literacy has continually evolving, effective assessments cannot be actually declined from 40 to 31 percent in the past static; they must be reviewed periodically and decade. (Commission Appointed by Secretary of adapted in order to remain useful. education Margaret Spellings, 2006) 2. Cost-effective assessment processes yield Merging with this thrust is the historical effort to dividends that justify the institution‘s investment in increase attention on assessment that focuses on
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them, particularly in terms of faculty and staff time. policymakers need more comprehensive data to help To this end, institutions may begin by considering them decide whether the national investment in assessment measures, indicators, ―flags,‖ and higher education is paying off and how taxpayer ―scorecards‖ already in place, such as retention, dollars could be used more effectively. graduation, transfer, and placement rates, financial ratios, and surveys. New or refined measures may Accountability is here. Three major assessment then be added for those goals for which evidence of measures are compared and contrasted to ascertain achievement is not already available, concentrating the viability of the three in assessing business on the institution‘s most important goals. Effective students so that faculty and administrators in business assessments are simple rather than elaborate, and can make informed decision as to the measures they may focus on just a few key goals in each efficacy in their particular circumstance. The three program, unit, and curriculum. measures are: The ETS Major Field Test, ETS MAPPtm (Measure of Academic Progress and 3. Reasonably accurate and truthful assessment Proficiency), and CLA (Collegiate Learning processes yield results that can be used with Assessment). confidence to make appropriate decisions. Because there is no one perfectly accurate assessment tool or AACSB ACCREDITATION ASSESSMENT strategy, institutions should use multiple kinds of The Association to Advance Collegiate School of measures to assess goal achievement. Assessments Business (AACSB), the premiere accreditation may be quantitative or qualitative and developed institution for Colleges of Business, adopted locally or by an external organization. All assessment accreditation standards in 2003 that require business tools and strategies should clearly relate to the goals schools to provide an assurance of learning (Black & they are assessing and should be developed with care; Duhon, 2003). The standards describe an institutional they should neither be merely anecdotal information effectiveness framework that examines program nor a collection of information that happens to have accountability with a focus on results and been already collected. Strategies to assess student improvements particularly in terms of student learning should include direct—clear, visible, and achievement and development (Black & Duhon). The convincing—evidence, rather than solely indirect curriculum component of the standards asks for evidence of student learning such as surveys and evidence of learning outcome rather than intent focus groups (Black & Duhon). Professional accreditation societies (e. g., ABET and The AACSB standards require assessment activities AACSB International) are in the forefront of that focus on a degree program rather than the majors requiring accredited member institutions to meet within a degree (AACSB, 2007). Students must assessment outcomes. So, it is clear that there is demonstrate their knowledge or skill through direct, pressure from a variety of stakeholders demanding measurements (AACSB). The primary focus is on that educators demonstrate that students have the knowledge, skills, and competencies that the acquired the knowledge and skill sets that are deemed graduate of a specific degree program possesses important. As the Spellings Commission (2005) (AACSB). Faculty members are responsible for wrote: developing learning goals and objectives that clearly Despite increased attention to student learning results state the observable outcomes expected from by colleges and universities and accreditation students. The outcomes must be broken down into agencies, parents and students have no solid specific characteristics or traits that can be measured evidence, comparable across institutions, of how (AACSB). Once the measurement is established, much students learn in colleges or whether they learn faculty members discuss the results and use the more at one college than another. Similarly, results to improve student learning (AACSB). Evaluating the results and implementing appropriate
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modifications in the curriculum is a key part of the indirect methods such as job placement rates and assessment process and plays a crucial role in a surveys of alumni‘s employers provide valuable school‘s accreditation or reaccreditation (AACSB). information that may lead to the creation of learning objectives that meet job market requirements but are ASSESSMENT IMPLEMENTATION ISSUES not considered in the assessment process. AACSB‘s focus on direct measures in assessment, if taken Colleges and universities require the ability to literally, may direct a school to ignore key aspects of address many imperatives – efficiency, accessibility, its external environment. and diversity - to name a few. And, the AACSB, along with other accrediting organizations, require Time requirements for assessment may take evidence that the curriculum produces the desired resources away from educating students. Two results (Tagg, 2007). separate assessment programs may be necessary at a school. An assessment program focused on a specific Achieving or maintaining AACSB accreditations, degree and one separate assessment for each major schools must have an assessment plan that addresses within a degree. Assessment is valuable if it leads to issues set forth in the Assurance of Learning (AoL) meaningful improvements in the educational process. Standards (White, 2007). A strategic approach to the assessment process facilitates continuous MEASUREMENTS improvement through identification of goals followed with assessment to determine whether the process Direct measurements required in the assessment fulfilled the mission (Green, Stark, & Haley, 2007). process may take several forms: standardized tests, Progress has been made in meeting the new AoL course embedded measurements approaches, applied Standards, but many schools fall short in the use of projects, and standardized achievement tests. There assessment data to tie assessment results with is no single correct approach and AACSB is open to curriculum improvement. The linking of results with the use of a variety of methods to relate AoL (Bycio improvements is commonly referred to as ―closing & Allen, 2004). Each approach has its own set of the loop‖ (Martell, 2007). advantages and disadvantages. Issues to consider include whether the results may enable the institution Schools are not required to develop original to compare scores with other schools. The assessment assessment instruments. An effective AoL program process may be labor intensive to administer. The can focus on simplistic methods as long as it design of the instrument requires the availability of produces useful data (Beyer & Gillmore, 2007). subject-matter experts. Assessment should provide Measurement is difficult because it is an attempt to evidence to support the correlation between scores understand the complex and diverse undergraduate and actual business knowledge realizing that it is experience (Beyer & Gillmore). Assessments should very difficult to design a process that adequately measure what students learn in college and yield reflects the business curriculum across a degree information which faculty can use to improve program. learning or instruction (Beyer & Gillmore). Beyer and Gillmore (2007) report that a student‘s major STANDARDIZED TESTS profoundly affects both the content and skills learned in a degree problem. This phenomenon must be Standardized tests can be an effective tool for considered in planning and implementing efforts to assessing student achievement. The initial close the loop on the assessment process. construction of the tests as well as conditions for administration and scoring have a uniform procedure Martell & Calderdon (2005) report that most schools which enables the consistent interpretation of scores have not developed a strong assessment program to from one administration to the next. Tests may be meet AACSB‘s standards and are still struggling with developed internally or acquired from testing a trial-and-error process. There are concerns that organizations. Local instruments require considerable
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resources for creating, scoring, reporting, and measurement and often couple indirect measurements improving. An internal test may be tailored to a with test results in assessment reports (Pringle & specific program with the intent that the scores Michel). Research is needed into the development of accurately reflect the extent which learning an assessment procedure that can provide a consistent objectives are met but do not provide data for assessment of student learning and provides quality comparison with other schools. Expertise may not be information for improving educational delivery. available locally to verify the reliability and validity of the test properties. According to the AACSB Standards of 2003 Assurance of Learning Seeks evidence of learning Standardized tests offered by testing organizations outcomes, not intent. The focus is on the degree are a popular vehicle for determining whether program, not on majors within a degree (e.g., on the learning objectives are met. Schools using these tests BSBA degree, not on Accounting or Marketing). for evaluation and decision making should determine Focus is on knowledge, skills, and competencies that the scores are reliable and valid. Reliable tests expected of a business school graduate. Faculty must provide stable rank-order results through set learning goals and measurable objectives, which unambiguous questions. Test are considered valid must be measured DIRECTLY. Schools must ―close when scores reflect achievement on the dimensions the loop‖, meaning they must do the assessments, that the school wishes to evaluate and are used then demonstrate that they are using the assessment appropriately for evaluation and decision making. results to make related changes to their programs of Content validity exists when the test questions are study. consistent with the curriculum. Context validity addresses the extent to which scores are correlated Direct assessment measures can be course embedded, logically with other variables expected to be applied projects, or standardized achievement tests. associated with student achievement, for example, Such tests can be internally (school) generated or grade point averages (GPAs) (Bycio & Allen, 2007). externally (outside agency) generated. The focus of These expectations are formed by the school‘s this paper is on three externally generated tests: previous experience in assessing student ETS/MFT, ETS.MAPP™, and the CLA. performance. Scores on standardized tests can be a The remainder of the paper provides brief basis for curriculum development in the modification descriptions of the tests and a table that can be used of existing courses or the addition of new courses. for quick comparison of the tests along the following THE CHALLENGE nine dimensions:
The AACSB guidelines require considerable time Target Audience and resources to implement. AACSB suggests a five Areas of Testing year process including translation of goals into Skills specific objectives, and the alignment of curriculum with the goals. Measurements are complete in the Knowledge Base third year, and the final feedback occurs by the fifth Application year (AACSB, 2007). Colleges of Business respond to the assessment through a variety of methods which Value Added are time consuming, experience faculty resistance, Ownership of Results provide ambiguous results, and are inconsistent across institutions (Pringle & Michel, 2007). Some When Administered standardized testing is available from specialized Costs testing organizations, but colleges question the appropriateness of using the results of just one
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ETS/MFT Accreditation. Retrieved September 28, 2007, from http://www.aacsb.edu/accreditation/process/documen The ETS/MFT is created by the Educational Testing ts/AACSB_STANDARDS_Revised_Jan07.pdf Service. It consists of a number of Major Field Tests for undergraduate and MBA students. It provides Beyer, C. H., & Gillmore, G. M. (2007). testing for majors in various disciplines, not just Longitudinal Assessment of Student Learning: business. The goal of this test is to go beyond factual Simplistic Measurers Aren‘t Enough. Change. 39(3), knowledge. Students are required to analyze and 43-48. solve problems, to understand relationships, and to interpret material. This test can be given during a Bycio, P., Allen, J. S. (2004). A Critical Incidents capstone course. Approach to Outcomes Assessment. Journal of Education for Business. 80(2). 86-92. ETS/MAPP™ Bycio, P., Allen, J. S. (2007). Factors Associated The ETS/MAPP™ is also created by the Educational With Performance on the Educational Testing Testing Service. It is a measure of academic Service (ETS) Major Field Achievement Test in proficiency and progress. It is a general education Business (MFAT-B). Journal of Education for test, integrating critical thinking, reading, writing and Business. 82(4), 196-201. mathematics. It can be compared across institutions. Black, H.T., Duhon, D. L. (2003). Evaluating and CLA Improving Student Achievement in Business Programs: The Effective Use of Standardized The Collegiate Learning Assessment is created by the Assessment Tests. Journal of Education for Business. Council for Aid to Education. This test asks students 79(2), 90-98. to analyze complex material and provide written responses to questions arising from that material. It Commission Appointed by Secretary of Education is designed to be administered cross-sectionally, Margaret Spellings. (2006). A Test of Leadership: usually testing first semester freshmen then last Charting the Future of U.S. Higher Education. semester seniors. The CLA focuses on critical Washington, D.C.: U.S. Department of Education. thinking, analytic reasoning, written communication, and problem solving. It uses two types of testing Council for Aid to Education. (2007). Collegiate instruments: Learning Assessment (CLA). Retrieved September 25, 2007 from: Performance Tasks - in which students must http://www.cae.org/content/pro_collegiate.htm complete a ―real-life‖ activity (such as preparing a memo or policy recommendation) by using a series Educational Testing Service (ETS). (2007). Major of documents that must be reviewed and evaluated. Fields Tests (MFT): Undergraduate Educational Assessments. Retrieved September 25, 2007, from: Analytic Writing Tasks - which evaluate students‘ http://www.ets.org/portal/site/ets/menuitem.1488512 ability to articulate complex ideas, examine claims ecfd5b8849a77b13bc3921509/?vgnextoid=f119af5e4 and evidence, support ideas with relevant reasons and 4df4010VgnVCM10000022f95190RCRD&vgnextch examples, sustain a coherent discussion, and use annel=86f346f1674f4010VgnVCM10000022f95190 standard written English. RCRD
REFERENCES Educational Testing Service (ETS). (2007). Measurement of Academic Proficiency and Progress Association to Advance Collegiate Schools of (MAPP™). Retrieved September 25, 2007, from: Business (AACSB). (2007). Eligibility Procedures and Accreditation Standards for Business
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http://www.ets.org/portal/site/ets/menuitem.1488512 Student Learning in Business Schools: Best Practices ecfd5b8849a77b13bc3921509/?vgnextoid=ff3aaf5e4 Each Step of the Way. Tallahassee, FL: Association 4df4010VgnVCM10000022f95190RCRD&vgnextch for Institutional Research 27 – 42 annel=f98546f1674f4010VgnVCM10000022f95190 RCRD Middle States Commission on Higher Education. (2005). Assessing Student Learning and Institutional Green, Jr., K. W., Stark, C., Haley, J. (2007). Closing Effectiveness: Understanding Middle States the loop on assessment in a School of Business. Expectations. Philadelphia, PA: Middle States International Journal of Management in Education. Commission on Higher Education. 1(1/2), 43-56. Pringle, C., Michel, M. (2007). Assessment Practices Martell, K. (2007). Assessing Student Learning: Are in AACSB-Accredited Business Schools. Journal of Business Schools Making the Grade? Journal Education for Business. 82(4), 202-211. of Education for Business. 82(4), 189-195. Tagg, J. (2007) Double-Loop Learning in Higher Martell, K. & Calderon, T. (2005). Chapter 1 – Education. Change. 39(4), 36-42. assessment in business schools: what is it, where we are, and where we need to go now. Assessment of
Carolyn LaMacchia is an instructor of business information systems at Bloomsburg University of Pennsylvania. She is a Ph.D. student at Nova Southeastern University.
Carl J. Chimi is an associate professor of business information systems at Bloomsburg University of Pennsylvania. He received his Ph.D. in management information systems from the University of Massachusetts at Amherst.
David Martin is dean of the college of business at bloomsburg university of Pennsylvania. He received his Ph.D. in finance from St. Louis University.
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TABLE 1: Comparisons of Three Externally Generated Assessment Tests
ETS/MFT MAPP™ CLA
Business Graduates and General Education General Education Target Audience several other majors Students Students
Accounting (18) Critical Thinking Critical Thinking
Economics (16) Reading Analytic Reasoning
Management (18) Writing Written Communication Quantitative Business Mathematics Areas of Testing Analysis (13) Problem Solving
(numbers in parenthesis Information Systems (12) indicate the approximate Finance (16) number of questions for each area) Marketing (16)
Legal and Social Environment (12)
International Issues (embedded into about 12% of the test)
Analyze and solve problems Measurement of all four Critical thinking general education skills Skills Understand relationships (critical thinking, reading, Reasoning writing and mathematics) Interpret material Communication skills with one integrated test.
Business Core – Detailed General Education Core – General Education Core Knowledge Base Abstract - Abstract
Application N/A N/A Process Oriented
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ETS/MFT MAPP™ CLA
Meeting External Meeting External Institution: Requirements: Requirements: Focus is on how the Accreditation, strategic Accreditation, strategic institution as a whole planning and performance- planning and performance- contributes to student based funding. based funding. development.
Benchmarking and Trend Benchmarking and Trend
Analysis: Analysis: Value Added:
Document student Document student Focuses on the value Value Added achievement and program achievement and program effectiveness, and demonstrate effectiveness, and added provided by program improvement over demonstrate program colleges and time. improvement over time. universities by comparing what Developing and Improving Developing and improving students know when
Curricula: curricula they start college with what they know when A variety of score reports Meaningful comparisons they finish allow for detailed curriculum with other institutions that development, review and have administered the evaluation. MAPP™ test. Comparisons: Assessing Student Up to 50 multiple-choice Achievement: questions can be added. This approach also allows for inter- Can assess the level of student Equates to the former institutional achievement within a field of Academic Profile comparisons of overall study compared to that of assessment, allowing for value added.
other students in their program longitudinal or cross- and to the national sectional studies. comparative data.
Value Added (cont‘d.)
Business Faculty and Institution Institution Ownership of Results Individual Student
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ETS/MFT MAPP™ CLA
Senior year (maybe in Freshmen, Sophomores or Administered Twice: Capstone course) Upperclassmen Lower Division, then
When Administered Upper Division Students (Can be administered every year)
$26 per undergraduate $15.50 per test plus $5.50$15.50 Minimum per test plus$6500 $5.50 for thefor an optional essay Minimum $6500 for the institution + $30.00 per for an optional essay institution + $30.00 per Costs exam (minimum 100 students) $30 per graduate exam (minimum 100 students)
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PATENTED TAX LOOPHOLES-POLICY AND PRACTICAL CONSIDERATIONS John Grigsby, Lebanon Valley College
ABSTRACT
Recently, patents for tax reduction strategies have drawn attention from tax practitioners, taxpayers, Congress and the media. This article addresses the impact that patented tax strategies will have on tax policy, the tax profession, and on the integrity, fairness and administration of the tax system. It will discuss some of the recent litigation involving tax strategy patents. Possible solutions will be discussed such as changing the tax code, restricting the issuance of patents for tax strategies and changing the laws concerning patents.
INTRODUCTION Recently, many associations of tax professionals have expressed their views concerning the patenting Over the last few years, tax professionals have of tax strategies. The American Institute of Certified become increasingly concerned about patented tax Public Accountants, the American Bar Association strategies. Although much of this concern is due to a Section of Taxation and many state bar and suit filed at the beginning of 2006 concerning the accounting associations have all publicly opposed infringement of a patented estate planning technique, the patenting of tax strategies. They claim that tax tax strategy patents are not limited to estate patents preempt Congress's legislative control over planning. Tax strategy patents cover a number of tax policy; deny taxpayers equal and unfettered areas of tax practice including financial products, access to the provisions of the Internal Revenue charitable giving, employee benefits and stock Code and its interpretations; make it difficult for tax options. The consequences of infringing a patent can advisers to render advice to clients; might increase be substantial. The remedies for patent infringement the cost of tax advice to clients, and may mislead include injunctive relief and money damages against taxpayers into thinking that a patented tax strategy is an infringing party. Money damages can be tripled valid in the eyes of the Internal Revenue Service. in cases of willful infringement and attorney‘s fees can be awarded in some cases. BACKGROUND OF PATENT LAW Patents granted for tax strategies are categorized by A patent is a right granted by the federal government the United States Patent and Trademark Office as to an inventor giving him the exclusive right to business method patents. Business method patents make, sell, use or license his invention for a period have flourished since the 1998 landmark case of of twenty years. The power of the federal State Street Bank and Trust where the Federal government to enact patent legislation is enumerated Circuit held that business methods are patentable. in Article I Section 8 of the United States Following State Street, business method patents, Constitution which states that Congress shall have often involving financial transactions and computer the power ―to promote the Progress of Science and software, quickly became the fastest growing area of useful Arts, by securing for limited Times to patent applications. Since the State Street decision, Authors and Inventors the exclusive Right to their 60 tax strategy patents have been granted and respective Writings and Discoveries. another 86 are pending. Many of these tax strategy patents deal with planning techniques that are The statutory authority is found in 35 United States commonly used by tax practitioners in delivering tax Code, Section 101, which states that ―Whoever services to their clients. invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may
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obtain a patent therefore, subject to the conditions Patentable Subject Matter and requirements of this title." The Patent Act provides that ―whoever invents or A person who engages in any of the actions that are discovers any new and useful process, machine, within the rights of the patent holder has committed manufacture, or composition of matter, or any new infringement. In such a situation, the patent holder and useful improvement thereof, may obtain a patent has the right to bring an action in civil court against therefore, subject to the conditions and requirements those who infringe or induce others to infringe the of this title.‖ The categories, processes, machine, rights granted by the patent. The patent enjoys a manufacture, or composition of matter are presumption of validity in the lawsuit, though an considered to be patentable subject matter. Courts accused infringer may assert that the patent is invalid have held that patentable subject matter does not or unenforceable on a number of grounds. The include abstract ideas (i.e. mathematical algorithms), patent holder may seek injunctive relief as well as laws of nature, or natural phenomena, due to a money damages in an amount up to a reasonable concern for pre-emption if any person were entitled royalty for the uses covered by the patent claim. The to claim an exclusive right to these. money damages that may be claimed are ―no less In the past, some courts have held that methods of than a reasonable royalty.‖ A patent holder may doing business were not patentable subject matter claim lost profits if he can show that, but for the because they were not novel or non-obvious. infringement, he would have made the additional However, in 1998 the Federal Circuit held that a profits and the infringement is the proximate cause business method was patentable subject matter as of the lost profits. The question whether a patent long as it involved a process or machine within the holder must in some circumstances permit use of the meaning of the patent law. invention by another and accept money damages has been the subject of litigation. Although there has been authority that patentable subject matter must involve a machine or other Throughout the last two centuries there has been technological application such as a computer, recent significant legislation over the issue of what Patent Office interim guidelines for examination of constitutes patentable subject matter. In the last patentable subject matter allow the issuance of a twenty-five years, however, the U.S. Supreme Court patent without such a requirement. The Patent Office and the Court of Appeals for the Federal Circuit has requested public comment on these guidelines. have issued a number of opinions that have radically expanded the scope of what constitutes patentable Novelty subject matter. The novelty requirement is met unless the invention REQUIREMENTS FOR PATENTABILITY was known or used by others in this country, or was previously patented or described in a printed Inventors can obtain patents on processes, machines, publication in this or a foreign country. The prior manufactures, and compositions of matter that are knowledge or use that can preclude patentability is novel, have utility and are non-obvious. Under U.S. often referred to as prior art. patent law only the first inventor is entitled to a patent. An inventor must file a patent application Obviousness with the U.S. Patent and Trademark Office (USPTO) To be considered non-obvious, the invention must that completely describes the invention. The not be obvious to someone who is skilled and application must disclose the proprietary interest knowledgeable in the subject matter of the patent. asserted by the inventor. One common question is whether the invention would have been obvious to someone skilled in the
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field to combine elements of prior art to create a examples are of computer based patents, some of the claimed invention patents are based on the structure itself and some are related to tax planning only indirectly. Utility Split Dollar Life Insurance The term useful is not defined in the patent statute and the standard for utility is very broad. Some An example of a computer-based tax patent is one courts have noted that the utility standard is not high. that involves the use of split dollar life insurance. One commonly used definition is that an invention is Specifically, the patent employs a method for the useful if it is minimally operable towards some computerized administration of leveraged split dollar practical purpose or is capable of providing some life insurance coverage. A split dollar life insurance identifiable benefit. arrangement involves a method of paying for insurance where the premiums and proceeds are split First Inventor between the employer and employee. In a leveraged Patents are only granted to the first person to invent split dollar plan, the employer borrows against the an item. This may not necessarily be the first person cash value of the life insurance policy to partly cover to file the patent application. A first inventor must the cost of the insurance premiums. both have conceived of the invention and placed it in The patented business method includes storing service. A first inventor can lose the right to obtain a parameters of insurance policies and loan patent if he has abandoned, suppressed, or concealed agreements in a computer memory, over ranges of his invention. Thus difficult questions of fact may possible death benefits, cash values, loan principals, arise regarding when a first inventor is entitled to and incremental payments over a span of years. claim the rights to a patent even though another Employee factors are quantified and input into the person may have filed an earlier patent application. computer processor, which is programmed to EXAMPLES OF TAX STRATEGY PATENTS integrate the employee factors with the insurance and loan terms to select an integrated loan/insurance Tax strategy patents have been granted covering a arrangement to schedule payments to meet wide variety of tax planning areas including estate maximum contributions and retirement and life planning, financial products and insurance, expectancy expectations. The processor adjusts charitable giving, employee benefits and stock incremental payments for the employer and the options. Some patents rely primarily on the tax employee to ensure sufficient collateral and to structure itself while others focus on the use of a comply with tax regulations that are unfavorable to computer as an essential element of the business certain front-loaded payment schedules. method. Some patents relate to tax planning only indirectly. Estate Planning Patent applications that focused on the use of An example of a structure-based tax patent that does computers or other mechanical functions were not rely primarily on the use of computers is the so- favored by the Patent Office until recently. This called SOGRAT patent. The SOGRAT patent was meant that to obtain a patent for a tax technique or granted in 2003 to facilitate estate planning. The tax strategy, it had to be performed using a patent was designed to minimize estate and gift tax computer. For this reason, it was not always clear liability through the use of a grantor retained annuity whether a tax or other business method patent based trust (―GRAT‖) funded with nonqualified stock on the computerization of a particular planning options. technique might also grant rights to the underlying strategy separate from the computer application. In a GRAT, the grantor creates an irrevocable trust The following are some examples of patents that and retains the right to receive, for a specified term; have been issued for tax strategies. Some of the an annuity based on a specified sum or fixed
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percentage of the value of the assets transferred to TAX POLICY CONSIDERATIONS the trust. GRATs are frequently used in estate The purpose of granting patents is to encourage planning to transfer assets to family members at innovation. Patents provide holders with a 20-year reduced values. The rules governing the valuation of monopoly over their inventions in exchange for the a retained interest in a GRAT are found in sections complete disclosure of their invention, which others 2702(a)(2)(B) and 2702(b) of the Internal Revenue can use after the monopoly expires. Patent protection Code. In this patent, however, the actual invention should only be introduced into an industry when was the use of nonqualified stock options to fund the inventions in that industry are below optimal levels GRAT. and other incentives for innovation are insufficient. The SOGRAT patent had been the subject of Many tax practitioners believe that granting patents litigation in federal court based on alleged on tax strategies is inconsistent with the purpose of infringement (Wealth Transfer Group v. Rowe, No. the patent laws. They point to the fact that many tax 06CV00024, D. Conn., filed Jan. 6, 2006). The strategies have been created without patent parties to the lawsuit entered into a settlement at the protection and that the federal government has no beginning of 2007. reason to create additional incentives to reduce federal tax revenues. They argue that existing Tax Free Exchanges of Real Estate economic incentives are sufficient for the development, promotion, and implementation of tax A patent was granted for a specific method, which planning strategies. uses investment instruments to facilitate Section 1031 like-kind exchanges of real estate. It was Tax practitioners further believe that tax strategy modeled after a publicly issued Internal Revenue patents will do significant harm to the tax system Service Procedure concerning such exchanges. and to its key participants, including taxpayers, Congress, the Internal Revenue Service and tax Deferred Compensation practitioners. They believe that the public harm to the tax system and its participants will far outweigh A patent on hedging liabilities associated with a any public benefit derived from tax strategy patents. deferred-compensation plan was granted and assigned to a major brokerage firm. The patent Since the first hearings held on the subject of purports to provide a mechanism to hedge the patented tax strategies in July of 2006 by a compensation expense liabilities of an employer Congressional House Ways and Means providing deferred compensation to one or more Subcommittee, many national associations of tax employees. professionals have taken a negative view of patented tax strategies. Many of these organizations including Roth IRA Conversions the Internal Revenue Service, The American Institute of Certified Public Accountants and the A patent has been granted to evaluate the financial American Bar Association have made patented tax consequences of converting a traditional IRA to a strategies a primary focus of task forces and Roth IRA. It describes a computer-implemented committees of their members. A summary of their process for computing the tax consequences of arguments include the following that patented tax converting to a Roth IRA and various options for strategies: funding the taxes, such as term insurance to fund the Federal tax liability of an early withdrawal for * Limit taxpayers' ability to use fully tax law premature death, calculating the entire rollover interpretations intended by Congress; amount and financing the tax and insurance * May cause some taxpayers to pay more tax than premium. Congress intended or more than others similarly situated;
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* Complicate the provision of tax advice by involved in the USPTO's consideration of a tax professionals; strategy patent application. * Hinder compliance by taxpayers; * Mislead taxpayers into believing that a patented These organizations are concerned that tax tax strategy is valid under the tax law professionals also may be unable, as a practical * Preclude tax professionals from challenging the matter, to challenge the validity of patented tax validity of a patented tax strategy (Hoops, strategies as being obvious or lacking novelty, due to 2007). their professional obligations of client These organizations are concerned about patents for confidentiality. Tax professionals may also find it methods that taxpayers use in arranging their affairs difficult to defend patent-infringement lawsuits due to minimize tax obligations. They believe that to client confidentiality. The USPTO will also find it patented tax strategies may limit taxpayers' ability to difficult, if not impossible, to determine whether use fully interpretations of law intended by proposed tax strategies meet the statutory Congress. As a result, they thwart Congressional requirements for patentability because tax advice is intent and, thus, undermine the integrity of, and the generally provided on a confidential basis. public's confidence in, the tax system. They further IMPACT ON THE TAX PROFESSION believe that patented tax strategies also unfairly cause some taxpayers to pay more tax than was Tax practitioners are concerned that tax strategy intended by Congress or by others similarly situated. patents could have a dramatic effect on the tax They believe that the conflict with Congressional profession. They are concerned about their potential intent highlights a serious policy reason against legal liability for using tax strategies that were once allowing patent protection. Allowing a patent on a available to all practitioners but are now being strategy for complying with a law or regulation is claimed to be the exclusive right of their patent not sound public policy because it creates holders. They feel that such patents hinder their exclusivity in interpreting the law. ability to provide tax advice and make it difficult for their client‘s to comply with the tax laws. At the Many of these organizations are also concerned with same time, they are faced with the ethical tax law simplicity and administration and argue that responsibilities imposed on tax professionals that patented tax strategies complicate tax advice and may involve another and possibly conflicting set of compliance. Tax law is already quite complex. They pressures. believe that the addition of rapidly proliferating patents on tax-planning techniques and concepts will Keeping abreast of the constantly changing and render tax compliance much more difficult. extremely complex tax code is, by far, one of the greatest challenges that tax professionals face in Because patented tax strategies are granted by the providing high-quality tax services to their clients. Federal government, they are concerned that they Now, in addition to being current in their field, pose a significant risk to taxpayers. Taxpayers may practitioners must also determine whether their be misled into believing that a patented tax strategy advice is actually theirs or another party's exclusive bears the approval of other government agencies property. While this may seem absurd, practitioners such as the Internal Revenue Service and, thus, is a must now contend with other practitioners and valid and viable technique under the tax law which private companies seeking patents to protect their is not the case. The USPTO does not consider the exclusive right to use various tax planning ideas they viability of a strategy under the tax law. The USPTO claim to have developed. They may be surprised to is authorized only to apply the criteria for patent find that strategies that they have routinely used in approval as enacted by Congress and as interpreted their practices are now patented and unavailable for by the courts. The Internal Revenue Service is not use without the patent holder's permission. The trend
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of patenting tax strategies is on the rise and the Prohibiting Patentability USPTO continues to issue patents for tax strategies. Many of the large and powerful associations of tax Because of the potential liabilities associated with professionals would like to see legislation enacted patented tax strategies, practitioners may now want that would prohibit the patenting of tax strategies. to consider whether they should retain patent There is precedent for taking such action. Under counsel or other expert advice when they are dealing Title 42 of the United States Code, no patent can be with a potential patented strategy. Practitioners have issued for ―any invention or discovery which is an ethical duty to their clients and owe their clients useful solely in the utilization of special nuclear due diligence. They have a duty to disclose to their material or atomic energy in an atomic weapon.‖ clients any relevant tax strategy patents and the possibility of licensing the patent. They are also In early 2007, Senators Levin, Coleman and Obama required to disclose to the client whether they are a proposed an analogous prohibition for tax strategy holder of a license to the patent. patents. The Stop Tax Haven Abuse Act includes a provision to amend the patent law to prohibit patents Much of the concern over the patenting of tax for any invention ―designed to minimize, avoid, strategies is the direct result of a suit filed in January defer, or otherwise affect the liability for Federal, of 2006 alleging the infringement of an estate State, local or foreign tax.‖ Shortly thereafter, planning technique in which non-qualified stock Chairman Senator Max Baucus of Montana and options were used to fund a grantor retained annuity ranking minority member Senator Chuck Grassley of trust. U.S. Patent No. 6,567,7910 (commonly Iowa, joined in by introducing S. 2369 which would referred to as the ―SOGRAT‖patent) describes an halt the granting of tax strategy patents by the estate planning method for minimizing transfer taxes USPTO. Many of the large associations of tax in connection with the transfer of nonqualified stock professionals were behind the implementation of this options to a family member. The method uses a uses legislation. grantor retained annuity trust (GRAT), a technique for transferring property to younger generations of Practitioner Immunity the member‘s family at a discounted value. Instead of completely prohibiting patents on tax strategies, one alternative is to provide for immunity Most estate planners and other tax practitioners are from liability to practitioners for infringing or familiar with the use of GRATs in estate planning inducing infringement. A current provision of patent and many routinely use them as a tax planning law, sometimes referred to as the Physicians strategy. Therefore, many practitioners were Immunity Statute, prevents patent holders from surprised to learn that the technique of placing obtaining damages against medical practitioners for nonqualified stock options into a GRAT had been infringing patents on medical procedures. Congress patented. This surprise grew into concern when the enacted the Physicians Immunity Statute, in patent holder instituted an infringement suit against response to a controversial lawsuit in which one a taxpayer who implemented the technique without physician sued another for infringing a patent its permission. claiming a method of performing surgery. Under this POSSIBLE SOLUTIONS statute, the patent holder generally cannot obtain damages or injunctive relief against a licensed There a number of possible legislative and medical practitioner with respect to the performance administrative solutions to the problems created by of a medical activity that would otherwise qualify as patented tax strategies. Two of the more realistic patent infringement. options include the outright prohibition on patenting tax strategies and providing immunity for It appears that Congress could enact a similar statute practitioners who use such strategies. to shield those employing tax strategies from patent
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infringement liability. An important advantage of REFERENCES this approach includes the fact that the patent system Hoops, J. (2007, February 27). AICPA Urges policy of disclosure of novel ideas is, to some extent, Congress to Address Tax Strategy Patents. The furthered. AICPA Web. Retrieved September 7, 2007, from http://tax.aicpa.org. CONCLUSION Patents for tax strategies present unique concerns for (2007, November 19). Senators Baucus and Grassley practitioners, taxpayers and politicians. The United Introduce Bill Banning Tax Strategy Patents; AICPA States Patent and Trademark Office will continue to Urges Passage of S. 2369 Before Coming Tax issue patents for new tax strategies until laws are Season. Retrieved December 2, 2007, from enacted to prevent them from doing so. In the http://aicpa.org. meantime, professional tax organizations should continue to take a proactive role against the patenting of tax strategies.
Although the prospect of legislation to address the issues created by tax strategy patents seems likely, until such legislation is enacted, practitioners should attempt to minimize potential liability by reviewing tax patents as they are issued and consulting with legal counsel whenever there is a potential for infringement. Practitioners may want to consider obtaining a license for the patent or abandoning the strategy completely.
John D. Grigsby is an assistant professor at Lebanon Valley College. He received his LL.M. in Taxation from Georgetown University Law Center. His other research interests are tax law, estate planning, financial planning and elder law.
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THE ASSOCIATION BETWEEN CORPORATE GOVERNANCE AND AUDIT FEES Cindy K. Harris, Ursinus College
ABSTRACT
The Sarbanes-Oxley Act of 2002 (―SOX‖) established not only corporate governance reform but also legislated significant changes to the practice of auditing publicly held corporations. Rules implemented by the Securities and Exchange Commission (―SEC‖) further reinforced stronger corporate governance standards. The effect of these reforms on the cost of public audits is indisputable: the initial rise in audit fees was dramatic as corporations complied with the new provisions. This paper examines the relationship between corporate governance characteristics and audit fees for a random sample of 100 publicly traded corporations drawn from the 2005 Fortune 500 list. The data is obtained from SEC proxy statements and annual report filings for the 2005 fiscal year. The study examines characteristics of the audit committee and board of directors, while controlling for several financial measures generally associated with higher audit fees. The corporate governance attributes include two measures of expertise (the number of audit committee financial experts and the average number of outside directorships held by board members) and two measures of diligence (meeting frequency of audit committee and board of directors). The results indicate a positive, significant relationship between both measures of expertise and audit fees. In addition, greater frequency of board of directors meetings is also significantly related to higher audit fees, while audit meeting frequency is not. This outcome suggests that higher quality corporate governance as measured by fiduciaries‘ expertise and board diligence is associated with higher audit costs.
INTRODUCTION experienced skyrocketing audit fees. In addition, SOX has clearly set up a different environment in The role of corporate governance has increased in which boards operate. It has made board meetings magnitude since the passage of Sarbanes Oxley in more compliance-focused than in the past, requiring 2002 (―SOX‖) and new regulatory requirements of directors to delve ―deeper than ever before into what the Securities and Exchange Commission (―SEC‖). it takes to fulfill their role as fiduciaries. The legislated changes to the composition and Expectations of the board continue to grow and expanded role of both the boards of directors of evolve, with the added pressure that directors must public companies and their audit committees stem increasingly focus on their potential liabilities‖ from the ―series of corporate scandals that raised (Eckbo, 2006). Likewise, the role and practices of the concerns over the effectiveness of existing corporate audit committee are experiencing a shift. Increased governance standards‖ (White & Case). The goals of time and effort is now required of audit committee the new rules are to enhance transparency, members to communicate with key organization accountability and objectivity in the oversight by personnel, monitor the internal audit function, boards of directors and board committees. The hope oversee conflicts of interest, and ensure auditor is that achievement of these accountability goals will independence (Lipman, 2006). promote increased investor confidence in the financial markets for public companies‘ securities. Debate persists about whether the dramatic rise in audit fees is a onetime increase in the costs of SOX mandated that the SEC issue rules to implement compliance with Section 404 or whether there has expanded disclosures about the internal controls of been a permanent shift as a consequence of SOX that public companies. Corporations subject to the will create an ongoing environment of higher audit expansive reporting and attestation provisions of fees. Section 404 of SOX have as a consequence
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In this study, I examine the relation between corporate governance. The characteristics of the corporate governance and audit fees for Fortune 500 board of directors can influence audit costs because companies since the implementation of SOX, in executing its monitoring duties the board seeks ―to including its Section 404. All of the companies protect its reputational capital, to avoid legal liability comprising the sample engaged a Big 4 auditor, so and to promote shareholder interest by purchasing that there is no difference in the level of audit quality differentially higher audit quality‖ (Carcello, 2002). provided by the external auditors. The purpose of the In addition, the auditor may provide higher quality study is to discern to what extent audit fees in the assurance services if it is understood that the board post-SOX environment can be linked to measures of (i.e. the client) is ―particularly high quality and both board and audit committee expertise and demanding‖. (Carcello, 2002). In their study Board diligence. Prior research supports the notion that a Characteristics and Audit Fees, Carcello et al board that is more diligent and expert ―may demand examined the relationship between audit fees and differentially higher audit quality (which requires measures of board independence (percentage of more audit work)‖ than would normally be demanded outside directors on the board), board diligence in order to protect the board‘s self interest. (Carcello, (number of board meetings) and board expertise 2002) (average number of other director positions held by non-management directors). Using sample data for The number of board meetings that occurred during fiscal years ending between April 1992 and March the year is used as a proxy for board diligence. Board 1993 for ―Big 6‖- audited Fortune 1000 companies, expertise is measured using the average number of all three board measures were found to have a other director positions held by a company‘s board of significant, positive relationship with audit fees. directors. Audit Committee expertise is captured by the number of financial experts serving on the Further, the study examined separately the impact of committee. There is a significant, positive comparable variables for the audit committee on relationship between board diligence, board audit fees, given its critical role of interacting directly expertise, and audit committee financial expertise and with the external auditor. Audit committee audit fees. However, unlike prior research findings, independence and expertise both had a significant, in which audit committee variables were not positive relation with audit fees, but audit committee significant in the presence of board variables diligence (i.e. number of meetings) was not (Carcello, 2002), this study notes a significant, significant. Interestingly, when the three measures of positive relationship between the number of audit independence, diligence and expertise for both the committee financial experts and audit fees. This board and the audit committee were included in their outcome is important because it indicates the growing regression model, all three board measures persisted impact of financial experts on the cost of audits. In in having significant, positive association with audit addition, it is noteworthy that when audit committee fees but none of the audit committee variables were meeting frequency rather than board meeting significant. frequency is utilized as a measure of diligence, it is not statistically significant. This outcome differs from In The Association between Audit Committee previous findings (Abbott, 2003), and suggests the Characteristics and Audit Fees, researchers noted increasing role of the board and the positive that ―audit committees seeking a higher level of audit association between its meeting frequency and audit assurance could demand a greater level of audit fees. coverage resulting in higher audit fees‖ (Abbott, 2003). They tested the relation between audit fees PRIOR RESEARCH STUDIES and attributes of the audit committee using more AND BACKGROUND recent 2001 sample data of ―Big 5‖- audited companies. Both audit committee independence Several research papers document the observed (composed entirely of outside, independent directors) relationship between audit fees and measures of
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and audit committee financial expertise (at least one independent. In addition, the audit committee also member with financial expertise) had significant, must have not only members who are all ―financially positive associations with audit fees, while audit literate‖ but also at least one member who is a meeting frequency (meeting at least four times ―financial expert‖, and the criteria for satisfying that annually) was not significant. (Abbott, 2003) These role is more clearly delineated. Finally, both the results were different from those of Carcello et al, board and the audit committee are much more because these audit committee quality measures were empowered entities than they were previously. The significant in conjunction with board variables authority and responsibilities of the audit committee included as control variables. Board meeting have been augmented. Among other things, the audit frequency and board independence were also committee now determines the appointment of and statistically significant in positively affecting audit compensation for the company‘s independent fees, although board expertise was not. Thus, the auditors (previously administered by the board), and findings of Abbott et al expanded those of Carcello, also must pre-approve all audit and non-audit suggesting that audit committee attributes can also services provided by the independent auditors. As have an impact on audit costs. well, the board is now required to establish and disclose its corporate governance guidelines; it must These studies contributed to the examination of also establish a nominating/corporate governance corporate governance measures and their influence committee and a compensation committee, in each on audit fees in a pre-SOX environment. However, case composed entirely of independent directors. the impact of SOX on the role and functions of both Further, the chief executive officer is required to st the board and the audit committee in the 21 century certify annually that he or she is not aware of any renders the results of these studies outdated. violation by the company of the NYSE‘s corporate Empirical studies prior to SOX focused on the governance listing standards. relationship between audit fees and audit committee characteristics (independence of committee members HYPOTHESES and financial expertise of committee members) that were recommended as ―best practices‖ but were not The monitoring of the financial reporting process is required. These recommendations stemmed largely of critical importance in the post-SOX time period, in from the report of the Blue Ribbon Committee on which board members and their audit committees are Improving the Effectiveness of Corporate Audit being held to increased standards of performance. Committees, sponsored by the New York Stock Given these conditions, it is fitting to examine the Exchange and the National Association of Securities connection between audit fees and corporate Dealers. Since SOX, many of these recommendations governance characteristics in the context of this new have been legislated, and public companies have reporting and disclosure environment. Four reacted to the need to ―restructure the board of hypotheses are set forth below related to audit fees directors and the audit committee to effectively and the attributes of the board and its audit undertake the new responsibilities assigned by the committee. Sarbanes-Oxley Act‖ (The Sarbanes-Oxley Act and Board of Directors Expertise Evolution of Corporate governance, CPA Journal, March 2004). Directors have a fiduciary responsibility to exercise care in monitoring management and to act judiciously Several significant changes legislated by SOX and in establishing and carrying out corporate strategy to the SEC affect corporate governance. The first relates maximize shareholder wealth. Directors who are to independence: there are more stringent standards involved in a greater number of boards are likely to for defining independence and it is now mandated possess an increased level of expertise in achieving that all audit committee members be independent and these goals. Furthermore, through service on a majority (2/3) of the board of directors must be multiple boards, they have invested significant time
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and effort into developing reputational capital, and An "audit committee financial expert" possesses the will seek to sustain their professional standing. More appropriate educational background, prior experience experienced directors want to avoid legal liability and as a chief financial officer and/or chief executive do not want to be associated with corporate failures officer, understanding of generally accepted or fraud, and therefore will support the purchase of accounting principles and financial statements, and higher than normal audit services to insure may also have membership on various audit appropriate financial reporting and disclosure. committees. Audit committee members who are financial experts ―provide additional support for the Board expertise is measured by the average number external auditors when discussing or negotiating of additional directorships held by the directors of the auditing issues and/or audit scope with management. board. Firms with stronger corporate governance Such expertise allows audit committee members to through greater board expertise will seek higher better understand the auditing issues, risks, and the quality financial reporting, which leads to higher audit procedures proposed to address these issues and audit fees and this hypothesis: risks.‖ (Abbott, 2003) Thus, an audit committee with more financial experts can enhance the competence H1: There is a positive association between of the committee and the quality of its role in the audit fees and board of directors’ expertise financial reporting process. In turn, an audit Board of Directors Diligence committee with more financial experts will affect its execution of responsibilities to seek a higher quality Meeting frequency is an indication of and a proxy for audit from its auditors, which leads to higher audit board of directors‘ conscientiousness. A board that fees, leading to this hypothesis: meets more frequently can increase the effectiveness of its oversight role by being more aware and H3: There is a positive association between knowledgeable of important corporate, strategic and audit fees and the number of audit committee financial experts financial reporting issues and concerns. SOX has added to the board‘s plate the need to address SOX Audit Committee Diligence compliance issues, such that directors find ―they are spending so much time with the audit committee and Meeting frequency is an indication of and a proxy for issues related to legal and ethical considerations‖ audit committee diligence. A committee that meets (Eckbo). As a result, boards that meet more often more frequently will be more aware and can interact with the audit committee, and thus may knowledgeable of significant accounting, reporting influence audit activity and coverage during various and auditing concerns. With the passage of SOX, stages of the audit, leading to this hypothesis: ―the workload is more detailed, demanding and increasingly somber‖ such that ―audit committee H2: There is a positive association between members must be willing to attend more frequent and audit fees and board of directors’ meeting longer meetings.‖ (Sweeney, 2002) Thus, audit frequency committees that have more meetings per year can influence audit activity and coverage during various Audit Committee Financial Expert stages of the audit, leading to this hypothesis: The audit committee is a subgroup of the H4: There is a positive association between corporation‘s board of directors. Under SOX, the audit fees and audit committee meeting audit committee selects the independent audit firm frequency for ratification by the stockholders, sets the external auditor‘s fees, and reviews the scope of the auditor‘s REGRESSION MODELS services. All audit committee members of publicly held firms are required to possess financial literacy, Two empirical models are used to test the and must now include at least one financial expert. hypotheses. The first model tests the association
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between audit fees and board of directors‘ diligence, The second empirical model includes the same board of directors‘ diligence, and audit committee measures of board and audit committee expertise, but financial experts. substitutes audit committee diligence (AUDMTG) for board of director diligence to test its association with MODEL 1: audit fees. AUDMTG is measured as the number of meetings of the audit committee held during the year LNAF05 =β0 + β1 BODMTG + β2 AVGOSDIR + as disclosed in the proxy statement. β3FINEX + β4ARPERC + β5INVPERC + 2 β6LEVERAGE + β7SUBSID – β8SUBSID + β9TA – MODEL 2: 2 β10TA
LNAF05 = LNAF05 =β0 + β1 AUDMTG + β2AVGOSDIR + The dependent and independent variables are defined β3FINEX + β4ARPERC + β5INVPERC + as follows: 2 β6LEVERAGE + β7SUBSID – β8SUBSID + β9TA – β TA2 LNAF05: Consistent with many previous 10 studies on audit fees, the dependent variable is the SAMPLE SELECTION natural log of 2005 audit fees (expressed in millions of dollars). A random sample of 100 companies was selected from the Fortune 500 listing for the year 2005. BODMTG: Board of directors‘ diligence is Fortune magazine compiles and publishes the list measured as the number of meetings of the board annually, which is a ranking of the top 500 United held during the year as disclosed in the proxy States public corporations as measured by gross statement. revenue, although eligible companies are any for which revenues are publicly available. Only firms AVGOSDIR: Board of directors‘ expertise is which were audited by the Big Four were included in measured as the average number of outside the sample since prior research indicates that services directorships held by directors. provided by large audit firms have different price FINEX: Audit Committee expertise is structures; that is, clients who engage larger firms measured as the number of financial experts who tend to pay higher fees than those which obtain audit serve on the committee. services from regional auditing firms. A distribution of the sample, by industry, is presented in Table 1, In addition to these test variables, a variety of control (all tables are included in the appendix at the end of measures are used that have been found in prior the article) and reflects that nearly half of the literature to typically have a positive effect on audit companies in the sample operate in the fees. These control variables include: (1) the manufacturing sector. complexity of the audit, as measured by several factors: the proportion of total accounts receivable DESCRIPTIVE STATISTICS relative to total assets (ARPERC), the proportion of Descriptive statistics of the variables used in the total inventory relative to total assets (INVPERC) and regression models are presented in Table 2. The the number of subsidiaries (SUBSID); (2) the size of average 2005 audit fee for the sample companies was the client, as measured by total assets (TA); and (3) $8.02 million. The average decline in audit fees from the risk of the client, as measured by total debt 2004 was 8% with 68% of firms in the sample divided by total assets (LEVERAGE). The SUBSID experiencing a decline in audit fees while 38% and TA variables are also squared (SUBSID2 and experienced an audit fee increase (not reported in TA2), given the expectation that audit fees will Table 2). The average number of outside increase with the number of subsidiaries and total directorships held by board members was 1.98 assets, respectively, but at a decreasing rate. (minimum of .14 and maximum of 5.22) while the
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average number of financial experts was 2.24 expected, but not statistically significant. This result (minimum of 1 and maximum of 6). Board of is likely because the firms comprising this sample, director meetings averaged 8.56 (minimum of 4 and despite their varying degrees of debt, are large, stable maximum of 26) while the average number of audit corporations; in addition, the incremental costs of committee meetings was 9.47 (minimum of 4 and auditing contractual debt obligations is not maximum of 22). dramatically affected by the magnitude of the debt. In contrast, INVPERC is negatively associated with A correlation matrix of the dependent and audit fees and statistically significant. This outcome independent variables is presented in Table 3. Three is contrary to expectations and cannot readily be of the test variables are correlated with the natural log explained. This peculiar result differs from that noted of 2005 audit fees (LNAF05) with the average in prior studies cited in this paper, in which a number of outside directorships held by board comparable variable was either statistically members (AVGDIROS) exhibiting the largest insignificant or had a positive, significant association correlation at .40 (p-value <.0001). Among the with audit fees. control variables, total assets (TA) and number of subsidiaries (SUBSID) reflect the largest correlation Model 1, which regresses LNAF05 on the control with LNAF05 at .52 (p-value <.0001) and .25 (p- variables and the three test variables related to board value <.0108), respectively. Inventory as a of director meeting frequency (BODMTG), board of percentage of total assets (INVPERC) indicates a director expertise (AVGOSDIR) and audit committee surprising correlation with LNAF05 of -.49. Among financial experts (FINEX) has an adjusted R2 of .53. the explanatory variables, the two largest correlations All three attributes reflect a significant, positive are (1) .34 (p-value <.0005) between the number of association with audit fees, thereby providing support audit meetings (AUDMTG) and number of board of for Hypotheses 1, 2 and 3. In terms of the degree of director meetings (BODMTG) and (2) .32 (p-value impact these explanatory variables have on audit <.001) between total assets (TA) and the average fees, holding one additional board meeting results in number of outside directorships held by board a 3% increase in audit fees, while increasing average members (AVGDIROS). outside directorships by one results in a 14% increase in audit fees. Using the average audit fees for 2005 of REGRESSION RESULTS $8.02 million, these effects are equivalent to a $240,000 and $1.04 million increase, respectively, in Table 4 summarizes the results from three audit fee audit fees. The presence of one additional financial regressions. The Control Model regresses LNAF05 on expert on the audit committee raises audit fees by 8 only the seven control variables included in the percent, equivalent to a $642,000 increase. Thus, empirical models. Model 1 regresses LNAF05 on the these effects are of consequence. The coefficients and control variables and the three test variables related significance for the control variables are consistent to board meeting frequency, board of director with those indicated in the Control Model. expertise, audit committee financial experts (BODMTG, AVGDIROS, and FINEX). Model 2 Model 2 regresses LNAF05 on the same variables as regresses LNAF05 on the same variables as Model 1 Model 1, but substitutes audit committee meeting except it substitutes audit committee meeting frequency (AUDMTG) for board of director meeting frequency (AUDMTG) for board meeting frequency frequency (BODMTG) as the measure of diligence. (BODMTG). This regression results in an adjusted R2 of .52, negligibly lower than Model 1. Both variables The Control Model, which regresses LNAF05 on measuring expertise (AVGDIROS and FINEX) reflect control variables reflects an adjusted R2 of .497. All a positive, significant association with audit fees; of the control variables are significantly associated their coefficients are consistent with those in Model 1 with audit fees in the predicted direction, with two as are the observed results for the control variables. exceptions. LEVERAGE is positively related as
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However, although audit meeting frequency examines audit fees after the implementation of SOX, (AUDMTG) has the expected positive relationship and finds a concurrent link between audit fees and with audit fees, it is not statistically significant. board and audit committee variables (board diligence, Model 2 thus supports Hypotheses 1 and 3, but not board expertise, and audit committee expertise). Hypothesis 4. Substitution of audit committee Thus, this study adds to the growing body of meeting frequency for board meeting frequency in literature that finds a connection between several Model 2 sheds an interesting light on the greater facets of corporate governance and the fees paid for relative impact of the board as a whole versus the financial reporting and auditing. audit committee on audit fees. REFERENCES CONCLUSION L.J. Abbott, S. Parker, G. Peters, and K. This study is an initial effort to examine the Raghunandan ―The Association between Audit relationship between various board and audit Committee Characteristics and Audit Fees‖, committee characteristics and audit fees in the post- Auditing: A Journal of Practice & Theory, Vol 22. SOX corporate reporting environment. Although No 2 September 2003 (17-32) there is a limited amount of literature which focuses on the relationship between audit fees and corporate J.V. Carcello, D.R. Hermanson, T.L. Neal, and R.A. governance prior to the implementation of SOX, it Riley, Jr., ―Board Characteristics and Audit fees‖, was chiefly focused on only board of directors‘ Contemporary Accounting Research, Vol. 19 No. 3 characteristics. This empirical study examines the (Fall 2002) pp 365-84 impact of both board and audit committee factors on J.V. Carcello and T.L. Neal, ―Audit Committee audit fees, using more current audit fee data and Composition and Auditor Reporting‖, The reporting disclosures, which reflect the impact of the Accounting Review, Vol. 75, No. 4, October 2000, SOX requirements and SEC regulations of the early pp. 453-467 21st century. Ciesielski, Jack T. and Thomas R. Weirich, ―Ups and The results support the theory that higher quality Downs of Audit Fees Since the Sarbanes-Oxley Act, corporate governance as measured by board diligence a Closer Look at the Effects of Compliance‖, The and expertise as well as audit committee financial CPA Journal, October 2006, pp. 28-35 expertise is associated with higher audit costs. Consistent with prior studies, it reflects audit M.L. DeFond and J.R. Francis, ―Audit Research after committee meeting frequency is not associated with Sarbanes-Oxley‖, Auditing: A Journal of Practice & audit fees. Of particular note, the results differ from Theory, Vol. 24, Supplement, 2005, pp. 5-30 pre-SOX studies because they reveal the influence of both financial experts and board expertise on audit B.E. Eckbo, C. Elson, J. Lorsch, C. Bromilow, and fees, when both board and audit committee variables T.K. Kerstetter, ―Strategic Planning: The Board‘s are included in the empirical model. This signifies a Role‖, Emerging Trends in Corporate Governance, shift toward the increasing influence of experts on Corporate Board Member Academic Council external audit costs in the post-SOX environment. Supplement 2006 (4-10)
This paper is subject to a number of limitations. First, Keinath, Annemarie K., and Judith C. Walo, ―Audit the sample represents only very large public Committee Responsibilities‖, The CPA Journal, 2004 companies so the results may not apply to www.nysscpa.org corporations of smaller sizes. Second, there may be D.F. Larcker and S.A. Richardson, ―Fees Paid to other corporate governance factors not captured in Audit Firms, Accrual Choices, and Corporate this study which correlate with audit fees. However, the analysis uses more recent financial information,
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Governance‖, Journal of Accounting Research, Vol. W. Scott, R. Thompson, M. Useem, J. Daum, and 42. No 3 June 2004 (625-658) T.K. Kerstetter, ―Board Structure in the Future: An Art Rather Than a Science‖, Emerging Trends in Lipman, Frederick, ―Ten Best Practices for Audit Corporate Governance, Corporate Board Member Committees‖, www.fei.org, October 2006 Academic Council Supplement 2006 (12-17)
McCarthy, M. P. and Timothy P. Flynn, ―The Heat Skantz, Terrance and Denise Dickens, ―Can Fee Stays On‖, Financial Executive, June 2004, pp. 37-39 Disclosure Be Trusted?‖ Regulation, Winter 2005- 2006, pp. 46-47 Merkelevich, Ariel, Charles A. Barragato, and Rani Hoitash, ―The Nature and Disclosure of Fees Paid to P. Sweeney, ―Audit Committees Bracing for Auditors, An Analysis Before and After the Shakeup‖, Financial Executive, December 2002, pp. Sarbanes-Oxley Act‖, The CPA Journal, November 16-18. 2005 The Sarbanes-Oxley Act and Evolution of Corporate G. M. Pundit, V. Subrahmanyan and G.M. Conway, Governance, The CPA Journal, March 2004 ―Audit Committee Reports Before and After Sarbanes-Oxley‖, The CPA Journal, October 2005, White & Case LLP, ―New NYSE Corporate pp. 42-44. Governance Rules‖, Memorandum, November 2003, pp.1-14 Romano, Roberta, ―Quack Corporate Governance‖, Regulation, Winter 2005-2006, pp. 36-44 www.nasdaq.com/about/Blue_Ribbon_Panel.pdf, ―Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees‖ 1999.
Cindy K. Harris is an associate professor of business and economics at Ursinus College. She received her MBA from The Wharton School, University of Pennsylvania and is a Certified Public Accountant. Her other research interests are financial reporting, forensic accounting, and issues related to composition of the board of directors.
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TABLE 1 Sample Industry Distribution (n=100) Number of SIC Code Industry Observations 1000-1999 Mining, Construction 5 2000-2999 Manufacturing-Food, textiles, lumber, chemicals 26 3000-3999 Manufacturing-Rubber, metal, machinery, equipment 23 4000-4999 Transportation, Communication, Utilities 17 5000-5999 Wholesale, Retail 17 6000-6999 Finance, Insurance, And Real Estate 5 7000-9999 Services 7 Total 100
TABLE 2 Descriptive Statistics (n=100) Variable Mean Standard Deviation Minimum Maximum AF05 8.02 6.67 0.89 33.77 lnAF05 1.74 0.87 -0.12 3.52 arperc 12.42 10.65 0.00 61.23 invperc 13.65 17.65 0.00 80.38 leverage 59.54 19.53 15.61 125.07 Subsid 167.02 238.70 1.00 1,469.00 TA 25,656.00 36,404.00 1,313.00 208,335.00 FinEx 2.24 1.44 1.00 6.00 AudMtg 9.47 3.77 4.00 22.00 AvgDirOS 1.98 0.95 0.14 5.22 BODMtg 8.56 3.62 4.00 26.00
Notes: AF05 2005 audit fee in millions of dollars lnAF05 natural log of 2005 audit fee in millions of dollars arperc total accounts receivable as a percentage of total assets invperc total inventory as a percentage of total assets leverage total debt as a percentage of total assets Subsid number of subsidiaries TA total assets in millions of dollars FinEx number of financial experts AudMtg number of audit committee meetings AvgDirOS average number of outside directorships held by directors BODMtg number of board of director meetings
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TABLE 3 CORRELATION MATRIX (n=100) (p-values in italics) arperc invperc leverage Subsid TA FinEx AudMtg AvgDirOS BODMtg lnAF05 0.11 -0.49 0.08 0.25 0.52 0.19 0.10 0.40 0.20 0.288 <.0001 0.4326 0.0108 <.0001 0.0586 0.3416 <.0001 0.0432 arperc -0.11 0.08 0.05 -0.24 -0.01 0.02 -0.03 -0.10 0.2781 0.4221 0.6207 0.018 0.9142 0.8685 0.8002 0.3179 invperc -0.10 -0.10 -0.28 -0.07 -0.10 -0.28 -0.19 0.3413 0.3346 0.0043 0.4929 0.3381 0.0046 0.0543 leverage 0.07 0.01 -0.06 0.08 0.08 0.14 0.4825 0.9581 0.575 0.4395 0.4163 0.1672 Subsid 0.19 -0.02 -0.07 0.12 -0.01 0.0575 0.8264 0.4702 0.2183 0.8871 TA 0.16 0.04 0.32 0.18 0.1107 0.6881 0.001 0.0814 FinEx -0.02 -0.05 0.02 0.8362 0.6448 0.8254 AudMtg -0.17 0.34 0.0845 0.0005 AvgDirOS 0.00 0.9728
TABLE 4 Audit Fee regression results (n=100) *significant at 5% (Dependent variable = LNAF05) **significant at 10% Control Model: Model 1: Model 2: Variable Coefficient t-statistic p-value Coefficient t-statistic p-value Coefficient t-statistic p-value Intercept 0.91187 3.43 0.0009 * 0.20745 0.61 0.5450 0.28984 0.82 0.4143 AudMtg 0.01955 1.16 0.2473 BODMtg 0.03181 1.82 0.0724 ** FinEx 0.08460 1.98 0.0510 * 0.08592 1.98 0.0503 * AvgDirOS 0.14389 2.00 0.0481 * 0.15310 2.06 0.0421 * Arperc 0.02030 3.17 0.0021 * 0.02086 3.35 0.0012 * 0.01927 3.08 0.0027 * Invperc -0.01342 -3.44 0.0009 * -0.01074 -2.77 0.0067 * -0.01155 -2.98 0.0037 * leverage 0.00168 0.52 0.6064 0.00091 0.29 0.7748 0.00136 0.43 0.6698 Subsid 0.00145 2.14 0.0352 * 0.00159 2.42 0.0175 * 0.00153 2.31 0.0231 * Subsid2 0.00000 -1.94 0.0556 * -0.000001 -2.18 0.0317 * 0.00000 -2.04 0.0440 * TA 0.00003 5.26 <.0001 * 0.000026 4.77 <.0001 * 0.00003 4.56 <.0001 * TA2 0.00000 -3.57 0.0006 * 0.000000 -3.51 0.0007 * 0.00000 -3.27 0.0015 *
NOTE: Diagnostics on these regressions revealed that multicollinearity is not a problem.
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HORSES, REAL ESTATE AND THE HOBBY LOSS DEBATE Barry H. Williams, King’s College
ABSTRACT
The taxation of many businesses in the United States comes within the scrutiny of the Internal Revenue Service looking at whether the business was entered into with a profit motive. The scrutiny arises from activities which many times contain an element of pleasure for the taxpayer or a member of the taxpayers‘ family. When dealing with the horse industry, the Internal Revenue Service will focus upon the possibility of a profit occurring in the business and the intent of the taxpayer for entering the activity. This paper will explore the background of hobby losses and the use of profitability from the underlying assets in the horse breeding and training industries and how these assets may be able to satisfy the tests for the activity to be classified as a for profit business and the allowance of tax losses on a taxpayers tax return.
INTRODUCTION property does not impact the current taxable income of a taxpayer. The collection of tax in the United States is accomplished through a process of self reporting The realization concept presents a scenario where using an annual reporting period. This self reporting reporting different types of income from a business process creates a scenario where taxpayers must undertaking can occur in multiple tax years. An interpret an ever complex set of laws which are example of this concept occurs for virtually every continually evolving over time. The starting point for business where sales which occur in the ordinary the tax law comes through Bills enacted by Congress course of its trade or business are reported annually and the cumulative enactments have been codified while the change in value of the underlying assets into the Internal Revenue Code of 1986 (hereinafter used to produce the sales are reported only upon the referred to as the ―Code‖) (CCH 2007). The sale or exchange of these assets. While this seems to complexities that have developed over time have run contrary to the annual reporting period concept, been explained through Administrative the annual reporting of income and matching pronouncements, such as Regulations and Revenue deductions is necessary for the smooth collection of Rulings, and through Court decisions. tax over time.
The starting point for the collection of tax is through While the Code provides a broad definition of the determination of income. I. R. C. §62(a) (CCH income, the allowance of deductions is much more 2007) defines the term ―income‖ broadly to include restrictive. Deductions are permitted under I. R. C. § all income, clearly realized from whatever source 162 for the ordinary, necessary and reasonable derived. While the definition of income has been expenses of carrying on a trade or business of the subject to much litigation, the concept of realization taxpayer and under I. R. C. § 212 for the expenses has been deemed to require an exchange of property incurred in connection with activities engaged in for from which the gain proceeding from the ownership the production or collection of income or for the of the property is to be separated from the ownership management, conservation, or maintenance of of the property (Eisner, 1920). The mere change in property held for the production of income (CCH market values proceeding from the ownership of 2007). The Code makes it clear that any deduction associated with a trade or business not entered into
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for profit shall not be deductible against the gross (2) The expertise of the taxpayer or his income of the trade or business but as it would be advisers; treated if it were a personal deduction of the taxpayer, generally an itemized deduction, and the (3) The time and effort expended by the total deductions would be limited to the income of taxpayer in carrying on the activity; the trade or business (I. R. C. §183 CCH 2007). (4) The expectation that the assets used in The determination of whether a trade or business is the activity may appreciate in value; entered into for profit or whether it will be treated as (5) The success of the taxpayer in carrying not entered into for profit (referred to as a ―Hobby‖) on other similar or dissimilar activities; is to be made by reference to all of the facts and circumstances of each case. Although part of the (6) The taxpayer's history of income or facts and circumstances requires a reasonable losses with respect to the activity; expectation of profit, a profit reported on the tax return of the taxpayer is not required. The facts and (7) The amount of occasional profits, if any, circumstances must indicate that the taxpayer entered that are earned; into the activity, or continued the activity, with the (8) The financial status of the taxpayer; and objective of making a profit. In making the determining of whether or not such an objective (9) The elements of personal pleasure or exists, it may be sufficient that there is a small chance recreation involved in the activity (26 of making a large profit (26 CFR § 1.183-2(a)). CFR § 1.183-1(b)).
ACTIVITIES NOT ENTERED INTO FOR While some taxpayers focus upon these factors, they PROFIT are not the only ones the Internal Revenue Service (hereinafter referred to as the ―Service‖) will focus I. R. C. § 183 (CCH 2007) defines an activity not upon. The Service has an extensive list of questions engaged in for profit as one for which a deduction is that are asked through the initial interview with the not allowed under either I. R. C. §§ 162 or 212 taxpayer or their representative which can provide paragraphs 1 or 2 (CCH 2007). I. R. C. § 183 (d) data in making an initial determination by the Service (CCH 2007) creates a reputable presumption that an of whether the activity may be either for profit or not activity is for profit if it can show that the gross for profit. (MSSP, 2001) Since no one factor has income of the business for three or more tax years out been determinative in making an assessment of for of five consecutive years exceeds the deductions profit status, previous studies of Court decisions have attributable to the gross income. This presumption is found that conducting a trade or business in a expanded to two years out of seven for any activity business like manner was ―of primary importance‖ that has a major part of the breeding, training, (Hereth p. 52). While this is not the only factor that showing or racing of horses. must be considered, many of the factors in proving a When evaluating a trade or business for the purposes business like manner can be controlled by the of determining a profit motive, the Internal Revenue taxpayer, such as creating business plans and in the Service does not look exclusively at profits and use of business specialists to reduce expenses or losses but at a list of enumerated factors. The factors increase revenues. are: The Service looks extensively at the first factor, the (1) The manner in which the taxpayer manner in which the taxpayer carries on the activity, carries on the activity; in their Market Segment Specialization guide (MSSP, 2001). In this guide the Service specifies that the Internal Revenue Service Agent (hereinafter referred
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to as ―Agent‖) look to the books and records of the years of the business and the ―unlikelihood of activity, business plan, methods of operation, and achieving a profitable operation‖ to be a true bearing efficiency of operation during the course of an audit of the intention of the taxpayer to have entered into a of the taxpayers tax return (MSSP, 2001). In the business for profit (Golanty, 1979 and Dunn, 1978). guide the Service also gives an example of when conflicting results occur and advises Agents to be In both the Golanty and Dunn cases, the Courts took mindful of a form over substance circumstance. In into consideration all the enumerated factors from the one specific example, the Service discusses a regulations while evaluating the following factors taxpayer who is depreciating show horses while at together: #6 The taxpayer's history of income or the same time ―contended that these same show losses with respect to the activity; #7 The amount of horses are being held for resale‖ (MSSP, 2001). In occasional profits, if any, that are earned; #8 The this case a taxpayer would be trying to use the first financial status of the taxpayer; and #9 The elements factor to show that the business is being conducted in of personal pleasure or recreation involved in the a business like manner through the depreciation being activity. In these discussions the fact that the taken on the assets while at the same time trying to taxpayers‘ accumulated losses from the operations show that the expectation that the assets used in the would exceed the future net earnings of the activity may appreciate in value, therein meeting the businesses was also an issue. In neither of these fourth enumerated factor. cases did the taxpayers raise the issue of the underlying value of the assets, factor #4, being a The Courts have looked at the development of the specific factor supporting the increase in the future enumerated factors by the Service and the taxpayers net income of the business to a point where future in establishing an expectation that a business was profitability could show an overall profit motive entered into for profit. In looking at the factors the (Golanty, 1979 and Dunn, 1978). Courts did not count the factors with the majority winning, but evaluated them and made a judgment The fourth factor, the expectation that the assets used based upon a totality of the facts and circumstances in the activity may appreciate in value, involves of an individual case (Dunn, 1978). In Engdahl v. looking at the intent of the taxpayer at the time of Commissioner, the Court looked at all the factors and acquisition of the property and during the holding of found in favor of the taxpayer citing the fact that the the property. The issue is the determination of how taxpayer had put personal labor into the venture by many business activities the taxpayer is actually working on the ranch operation personally, gained no involved in with the land. The activities can be both personal pleasure activities from the operation, kept the holding of the land for investment and a horse complete books and records of the operation, and had farm operation or only a horse farm operation of relied upon advise from competent professionals in which the land is considered an integral part thereof. the conducting the business of the ranch‘s horse When the land is acquired with the primary intent of breeding activities (Engdahl, 1979). profiting from the increase in market value of the property and the taxpayer also uses it for a farming In two cases, Golanty v. Commissioner and Dunn v. operation and the ownership is considered two Commissioner, the Courts recognizing all the factors activities, special rules are enumerated. The special also focused upon the intention of the taxpayer to rule states that the farming operation and the holding make a profit. The Court in Dunn found the of the land will only be considered a single operation ―manifestations of a business‖ to be unconvincing when the income from the farming operation exceeds and found that the taxpayers long time interest in the deductions directly associated with the farming horses and the active involvement with them in other operations with the excess reducing the net costs of ways to be a strong indicator of a hobby rather than a holding the land for appreciation purposes (26 CFR § for profit business. The Court in Golanty found the 1.183-1(d)(1)). record of losses extending beyond the formative
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To illustrate the ascertainment of an activities status The business plan developed should address each of where several activities could be treated as separate the criteria utilized by the Service as enumerated in activities or one activity, Table I presents two the Regulations. In developing a business plan the situations. If the intent of the taxpayer is shown to be taxpayer should be prepared by a competent the acquisition of land for appreciation purposes, the professional with experience in developing business special classification rule in the Regulations controls. plans. The plan should also address the need for the Consequently, in situation 1, the cost of holding the underlying assets, such as land, to be used in making land for appreciation would be considered a part of a the horse operation a success. Including the use of single activity due to the income from farming the underlying asset in the plan can be used to exceeding the direct deductions attributable to it. In overcome the intent of the taxpayer to be interpreted situation 2, however, there would be two separate as buying the underlying asset for investment activities since the farming operation does produce an purposes. The Court in Myrick found that an excess of revenue over deductions and consequently expectation that land purchases for a horse operation does not assist with the offsetting of the lands may increase in value would not preclude the deductions. Situation 2 presents the taxpayer with taxpayer from utilizing the appreciation as income for the issue of demonstrating a business purpose without purposes of determining a business purpose. This using the increase in value of the underlying asset to decision was reached because the taxpayers showed offset any loss that may exist. that the land would be used in horse boarding/riding/training activities and the increase in Table I value was a safeguard in case the horse operation Ascertainment of Activity (26 CFR § 1.183-1(d)(1)) may not have been successful (Myrick, 1990). Situation Situation 1 2 Table 2 Farm Income $10,000 $5,000 Horse Farm Growth 1978 - 2002 Farm Deductions $7,000 $7,000 Surplus (Deficit) $3,000 ($2,000) Land Deductions $5,000 $5,000
HORSE OPERATIONS
―There is more to horse racing than a fast horse‖ (Hereth 51). When it comes to reporting the income (Offutt, 2006) and deductions from the breeding, training, showing or racing of horses this statement is very true. The The increase in the number of horse farms, shown in ability to construct a business model for a horse Table 2, is attributable to the growth in participatory related activity that will meet the form and substance horse activities including horse shows. This increase necessary to withstand the scrutiny of the Service in horse farms is coming at the same time that the becomes of primary importance if the deductions horse racing industry has declined over the same time related to the income is to become ―above the line‖ (Offutt, 2006). While there has been an increase in deductions and any losses are to be deductible against horse farms, the increase is coming from the same other forms of income. Business models constructed areas of horse activity that have a component of in this manner can be referred to as horse shelters personal pleasure that the Service has shown an since tax savings are a motivating factor for into the interest in investigating for not for profit status. transaction or activity and the savings also represent When evaluating the increase in value of farmlands a key component in the positive cash flow of the plan and the level of interest in horse farms, the use of the (MSSP, 2001). underlying value of the assets to justify an activities
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loss as being for profit becomes more attractive for increase could be used effectively, along with a bona use by taxpayers. This also means that the value of fide business plan, to create a one activity farm the farm land becomes important in times of inflation operation where the losses from the operations of the and deflation in real estate prices. farm could be offset by the appreciation in real estate in creating a for profit business model. Table 3 Farm Real Estate Values, By Farm Production Region, FURTHER STUDY January 1 For Selected Years Farmland values continued to rise in 2006 by Region 1982 1987 2000 2001 2002 2003 2004 approximately 13.3 percent and there is anticipation $/acre that in 2007 the increase will approach 13.7 percent. Northeast 1,367 1,491 2,660 2,830 3,000 3,200 3,400 Of concern for those utilizing these projected Lake States 1,234 707 1,560 1,700 1,870 2,010 2,220 increases in value are the slowly rising interest rates Corn Belt 1,642 900 1,890 1,950 2,030 2,130 2,300 compounded by a crisis in the mortgage market. Northern 547 331 535 556 576 594 632 Plains Non-farming demand for farmlands to be used for Appalachian 1,083 1,004 1,990 2,120 2,250 2,370 2,500 recreation and/or non-farm development may offset the concerns and continue to create upward pressure Southeast 1,095 1,055 1,920 2,030 2,140 2,270 2,420 on farmland values. The relatively low mortgage Delta States 1,135 757 1,270 1,330 1,390 1,490 1,550 interest rates and strong demand for housing in the Southern 576 532 672 715 755 788 832 Plains recent past have helped support growth in the Mountain 325 257 448 471 500 523 550 residential construction sector creating the demand Pacific 1,346 1,084 2,000 2,120 2,240 2,350 2,480 for the conversion of farmland into residential 48 States 823 599 1,090 1,150 1,210 1,270 1,360 property. However, the demand for new home Source: National Agricultural Statistics Service, construction is decreasing based upon data reported USDA. Table 1.2.1 (Wiebe, 2006) in late 2006 and in spring 2007. Since new housing starts are one of the indicators of the economic When considering the value of farmland, Table 3 conditions in the United States, this may also dampen illustrates that farmland values increased rapidly the increases in value of farmland (Farm Assets, during the decade of the 1970‘s and continued into 2007). the early 1980‘s. This boom period for farmland values was followed by a sharp decline during 1982 The changes in the market value create a concern for to 1987 time period. The trend then turned upward those utilizing the expectation that the assets used in with the average farmland values in the Nation an activity may appreciate in value. These taxpayers increasing 127 percent, from $599 per acre to $1,360 are faced with a possible decline in the income offset in January 2004. Adjusted for inflation this amounts of deductions and the possible interpretation of this to a 53-percent inflation adjusted gain. 2004 marked being that the business was not entered into for profit. the 17th consecutive increase since 1987 in the A further review of farmland prices and the demand national average value of agricultural real estate. Of for real estate can be completed as a means of significance in looking to farmland values, over the projecting the impact upon the hobby loss previous 4 years (2000 to 2003) in particular, farm determination. In addition, a further analysis of real estate values had increased substantially in all Court decisions involving the use of the underlying U.S. regions (Wiebe, 2006). asset values needs to be accomplished.
The period of farmland ownership through 2004 was The focus of the further study would be to develop a boom period for those looking to divest themselves strategies and changes in the existing system of of the land and realize a gain as well as for those determining hobby losses. The current system looking to utilize these gains to offset losses from the provides an elaborate and complex set of rules from operation of a horse or other type farm. This level of statutory, legislative and judicial sources. The
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solution could focus upon the same set of Hereth, R. & Talbott, J. (1993, November). recommendations that George K. Yin, Chief of Staff Economic and tax implications of thoroughbred of the Joint Committee on Taxation, made when racing. Journal of Accountancy, 176(5), 51-56. testifying before Congress. His testimony outlined Internal Revenue Code of 1986, 26 U.S.C. § 1 five principles to follow in crafting a solution through through § 9833 (CCH 2007). legislative means. Market Segment Specialization Program (MSSP), 1. Simplify the tax code; IRC SECTION 183: Farm hobby losses with cattle 2. Rely on objective, third party verification; operations and horse activities. Department of the 3. Avoid having tax consequences depend Treasury, Internal Revenue Service, TPDS No. upon difficult factual determinations; 86796N, Training 3123-015 (March, 2001). 4. Treat income and deductions consistently; and Offutt, S. & Korb, P. (2006, September). More 5. Supplement technical rules with women turning to horse farming. Amber Waves, U. standards. (Testimony of Joint, 2005) S. Department of Agriculture. REFERENCES Olincy, D. (1978, April). The I.R.S. plays the Dawson, R. Are your horse expenses tax deductible? horses…and loses. American Bar Association Retrieved June 25, 2007 from Journal, 64, 570-572. http://asci.unvm.edu/equine/lawhorselaw/hobby.htm. Stanley Thompson, et al. v. U.S., 90-1 USTC 50,043. Donald R. Myrick and Rachel J. Myrick v. Comm., Stanley A. Golanty and Lorriee M. Golanty v. TC Memo. 1990-368, 60 TCM 166, (July 19, 1990). Commissioner of Internal Revenue, 72 T.C. 411 Eisner v. Macomber, 252 U.S. 189, 40 S. Ct. 189, 64 (June 5, 1979). L. Ed. 521 (March 8, 1920). Testimony of Joint Committee on Taxation Chief of Farm assets and equity value gains expected to Staff George K. Yin at a Hearing of the Senate continue in 2007. U.S. Department of Agriculture, Committee on Finance on the $350 Billion Question, Economic Research Service, Briefing Room, Farm How to Solve the Tax Gap: Hearing before the U. S. Income and Costs: Assets, Debt, and Wealth. Senate Committee on Finance, 109th Cong. (2005). Retrieved October 23, 2007 from the U.S. Retrieved August 4, 2005 from CCH Internet Tax Department of Agriculture, Economic Research Research NetWork. Service at Wiebe, K. & Gollehon, N. (2006, July). Agricultural http://www.ers.usda.gov/Briefing/FarmIncome/wealt resources and environmental indicators, 2006 h.htm CCH Internet Tax Research NetWork. Edition, Economic Information Bulletin No. EIB-16. Herbert A. Dunn and Georgia E. Dunn v. Commissioner of Internal Revenue, 70 T.C. 715 (August 21, 1978).
Barry H. Williams is the chair of the department of accounting and finance at King‘s College in Wilkes-Barre, PA. He holds a Bachelor of Science in accounting and a Master of Business Administration from Wilkes University, a Masters in Taxation from Villanova University and a Juris Doctorate from Widener University. He is a licensed Certified Public Accountant in Pennsylvania and Florida and is a member of the Bar of the Commonwealth of Pennsylvania.
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ALTERNATIVE ENERGY HYBRID AUTOMOBILE TAX SUBSIDIES: AN ANALYSIS OF COSTS AND BENEFITS TO THE TAXPAYER AND PUBLIC Jerry Belloit, Clarion University of Pennsylvania
ABSTRACT
The 2005 Energy Act was the first major energy bill in many years. In it, there were several tax incentives for the adoption of alternative energy items that would reduce the national dependence upon fossil fuels such as the purchase of solar power systems, fuel cell systems, hybrid automobiles, etc. This paper focuses upon the hybrid automobile tax subsidy. It examines the magnitude of tax subsidy that would be required to encourage the adoption of hybrid automobiles. The paper will also attempt to identify public benefits of the use of hybrid automobiles and calculate the anticipated public costs and benefits. The emphasis of the paper is on public policy recommendations for tax policy.
INTRODUCTION quarters. The tax credit will be eliminated two quarters beyond that. Thus, for all Toyota products, Domestic dependence on foreign oil imports has been their tax credits ended completely on October 1, a significant social and political concern for several 2007. years. The Energy Tax Incentives Act of 2005 was one public policy attempt to reduce oil consumption. Hybrid vehicle sales have been steadily growing over One part of the law was the provision of tax credits the past several years. However, the most significant for those who purchased hybrid vehicles. This paper growth has occurred since the passage of the Energy will examine individual costs and benefits of Tax Incentives Act of 2005 as can be seen in the switching to a gas-electric hybrid vehicle from the graphic below:1 traditional gasoline version. It will also calculate the magnitude of government subsidy in the form of a tax credit that will be necessary to equate the costs and benefits. The paper will also examine the costs and benefits to the public.
The tax credits for purchasing hybrid gas-electric vehicles allowed under the Energy Tax Incentives Act of 2005 ranged from a maximum of $3150 for the Toyota Prius to $650 for the Honda Accord. The magnitude of the tax credit was computed by the government based upon the improvement in gasoline mileage by converting to a hybrid. The tax credit was reduced by 50% the quarter after the total hybrid-electric sales from a manufacturer exceeded 60,000 vehicles. Toyota was the first manufacturer to exceed the 60,000 sales barrier during the summer of 2006. Thus, beginning October 1, the tax credits 1 on all Toyota gas-electric hybrids were reduced by http://www.hybridcar.com/index.php?option=com_co 50%. The law further states that the credit will be ntent&task=view&id=66&Itemid=45&limit=1&limit reduced to 25% of its original level after two more start=3
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While automobile sales in through September 2007 Second, because monthly data on sales for 2005 was were generally weak, hybrid sales exceeded the 2006 unavailable, the annual sales were assumed to be total with sales through September 2007 of 263,536. level throughout the year. Normally automobile sales Through 2007, hybrid vehicle sales had grown to traditionally fall off in the fall (September, October, 2.2% of all vehicle sales.2 and November). The impact of this assumption is likely to be underestimating the number of gallons 2007 Sales saved and thereby underestimating the value to the All public of possibly lower prices as a result of a Share Hybrid Vehicle reduction in demand from the gasoline saving.
April 2.12% 28,330 1,338,836 Third, the profit margin on a hybrid-electric vehicle May 3.01% 47,096 1,564,170 and that of the standard gasoline-only version is assumed to be the same. Data on the real June 2.40% 34,885 1,455,649 manufacturers cost to the dealers was not available July 2.21% 28,895 1,308,946 and would have been suspect if it was available. The real dealer cost is obscured by dealer rebates and August 1.72% 25,384 1,478,604 profit sharing programs. It is hard to theorize how September 1.75% 22,973 1,315,357 the profit margins might differ. If the market segment that purchases hybrids is willing to pay a Average 2.20% 31,261 1,410,260 premium for a more ecologically friendly vehicle, hybrid cars might prove more profitable. On the ANALYSIS OF NECESSARY ASSUMPTIONS other hand, manufacturers may be willing to sell the hybrid-electric vehicles at a profit discount for public For this analysis, several simplifying assumptions relations reasons or for improvement of its fleet were necessary. In this section, each assumption will mileage rating. be examined. To the extent possible, the impact of relaxing the assumption will be suggested. It is also assumed that the price of gasoline will continue to rise at about a 10% annual rate over the First, the miles driven per year is assumed to be ten year expected life of the automobile. Further, it is 15,000.3 This average miles driven per year may be assumed that the battery life will also be ten years. an underestimate. Because the gasoline mileage from The battery assumption is based upon the battery life the hybrid is likely to be significantly greater than of the Honda Insight—the first hybrid to be sold. As other cars in the household, there may be a tendency of 2007, very few of the battery packs from then to substitute the hybrid vehicle for another in the Insights from the year 2000 have needed replacement household that has poorer mileage. Another factor because of battery failure. Also battery life seems to that might suggest that the average for hybrids relate less to the miles driven and perhaps more to the exceeds 15,000 miles per year is that because the fuel number of years in operation. expense is probably lower, there may be a greater tendency to drive an extra amount. The hybrid-electric purchaser cost-of-capital is assumed to be 10% to reflect the historic average return on stock market investments. According to
research from J.D. Powell, hybrid buyers tend to be
2 older and have higher incomes than other car http://www.hybridcars.com/market- dashboard/sep07-us-sales.html 3 From the 2001 National Household Travel Survey http://www1.eere.energy.gov/vehiclesandfuels/facts/2 004/fcvt_fotw328.html
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purchasers. 4 Consequently, a 10% cost of capital Hybrid Gas Savings seems reasonable. Vehicle Gallons Civic 153.04 Costs and Benefits of Hybrid-electric Ownership Accord 48.49 Escape 182.20 The purchaser of a hybrid vehicle pays a premium for Lexus GS 153.11 the hybrid technology. Excluded from this analysis are the Toyota Prius and the Honda Insight. These Lexus RX 200.64 vehicles do not have a gasoline-only model. Below Mariner 135.93 is a table listing the hybrid premium:5 Camry 220.95 Highlander 120.63 Gas- Prius 250.83 Only Hybrid Premium Insight 189.64 Civic 20145 23235 3090 Accord 22300 25695 3395 Next, the present value of the gasoline savings was Prius 16990 20950 3960 calculated using a 10% cost-of-capital, a first year Camry 21240 25200 3960 gasoline price of $2.83 per gallon, and a ten year Highlander 27300 33700 6400 useful life. The table below shows the hybrid RX400h 39915 43345 3430 premium, the present value of the gasoline savings, GS450h 44915 55655 10740 and the current federal tax credit for each of the Escape 19770 25265 5495 vehicles still in production. The Honda Insight was Mariner 20730 25765 5035 excluded because it ceased production in the summer of 2006. The Toyota Prius Hybrid has no direct The major advantage of a hybrid-electric technology gasoline-only model. To determine the hybrid is, of course, the gas savings. Below is a chart of the premium, it was compared with the Toyota Matrix, a expected number of gallons saved annually assuming vehicle similar in size and design. the car is driven 15,000 miles in a year.6 2008 Hybrid NPV Gas Model Premium Savings Credit7 Civic 3090 $3,584 1050 Accord 3395 $1,135 N/A 4 In 2004, J.D. Powell reports that the average income Camry 3960 $5,691 0 of a hybrid purchaser is $15,000 a year more. The Prius 3960 $5,400 0 average age of a hybrid purchaser was ten years Highlander 6400 $3,107 0 older. The income results were confirmed in a 2007 RX400h 3430 $3,944 2200 study by the Topline Strategy Group that reported that 71% of the Prius purchasers had annual incomes GS450h 10740 $5,168 1550 of greater than $100,000. See Escape 5495 $4,267 2600 http://www.hybridcars.com/hybrid-drivers/profile-of- Mariner 5035 $3,501 1950 hybrid-drivers.html. 5 The prices used in calculating the hybrid premium came from the manufacturer‘s web sites. They reflect the 2007 prices except for the Honda Accord 7 As of October 1, 2007 the tax credit for Honda model which used 2006 prices. Hybrids has been reduced to $1050 for the hybrid- 6 The gasoline savings was calculated by using the electric Civic. Beginning April 1, 2008, the credit average city/highway (combined) for the hybrid will be reduce to $525. The credit will cease on model and the gas-only model. The number of October 1, 2008. If sales continue at the current pace gallons needed to drive 15,000 miles was computed for Ford, their tax credits should continue until for each version. The difference was the number of sometime in 2010. Lexus tax credits should continue gallons saved by using hybrid-electric. in full until December 31, 2010.
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Examining the table above, the expected gasoline Costs and Benefits of the Federal Tax Credit savings is sufficient to pay for the hybrid premium for the Honda Civic, the Toyota Prius and Camry The cost to the government of the tax credit is limited without the tax credit benefit. In the case of the Ford to the years 2005 and 2006 for this analysis. The tax Escape, the Mercury Mariner, and the Lexus credit continues until December 31, 2010. In the RX400h, the current tax credit with the present value analysis of the benefits of the tax credit, only those of the gasoline savings is sufficient to pay for the cars qualifying for the 2005 and 2006 tax years are hybrid premium. Gasoline savings and tax credits for examined. the Toyota Highlander and the Lexus GS450h are not In computing the costs to the government, it is sufficient to pay for the hybrid premium. assumed that all purchasers took their tax credit. (It is This study only examined the economic benefits of possible that there were some purchasers who did not the gasoline savings and the tax credit. It did not pay income taxes and chose not to file for a refund or examine the value of state credits.8 There are other who did not know they were eligible for a tax credit.. benefits of hybrid technology that might influence To the extent this may have happened, the cost may their purchase. Research has indicated that the desire be overestimated.) Below is a table that summarizes to be ―green‖ was a greater motivator in the purchase the tax credits paid by vehicle. of hybrids.9 Another unaccounted benefit for hybrid 2005 2006 purchasers in some markets is free parking (hybrid Vehicle in dollars in dollars owners are exempt from putting money in parking Civic 43,968,800 65,631,300 meters in some areas) and/or quicker commuting (in Accord 10,936,900 7,277,400 the Washington DC area, hybrid drivers are allowed Escape 42,763,175 43,743,700 in some of the HOV lanes without having to have Lexus GS - 1,382,600 additional people in the vehicle.) Another benefit for Lexus RX 22,741,400 22,177,100 hybrid drivers is the time savings from having less Mariner 1,946,100 6,581,250 trips to the gasoline station. A Civic driver, for Camry - 71,073,600 example, saves about 15 trips to the gas station each Highlander 46,771,400 81,861,000 year. Also, because of the extended range of a hybrid Prius 69,937,775 294,838,819 vehicle, the owner is more able to take advantage of Insight 965,700 1,046,900 gasoline price savings. Another savings is an Adding the above tax credits, the following were the increased reliability and lowered maintenance. In the total costs to the government: latest Consumer Reports the Toyota Prius was listed at the most reliable family car. 10 Hybrids with 2005 $340,031,250 regenerative braking systems have much less wear on their brake pads since the back electromotive force 2006 $595,613,669 slows the vehicle as it recharges the batteries. The public benefits of these tax credits are theoretically numerous but generally difficult to quantify. The increased fuel efficiency and cleaner burning hybrid-electric engine significantly reduce air pollution. It is difficult to compute the financial public benefit of the reduced vehicle emissions from using a hybrid-electric vehicle rather than the 8 For example, Pennsylvania allows a $500 payment for purchasers of hybrid vehicles. equivalent gasoline only vehicle. These benefits 9 See http://www.hybridcars.com/hybrid- have a more significant economic value in urban drivers/prius-popularity-vanity.html areas where poorer air quality imposes significant 10 http://www.hybridcars.com/news2/toyota- burdens on the health care delivery systems. It is reliability-slips-hybrid-shines.html
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possible, however to quantify the quantity of the It is possible to compute an economic value of that reduction in air pollution. Below is a chart showing savings. In this study, the public benefit in the form the reduction in air pollution per car for each of the of a lowered gasoline price is computed. First, the four best selling hybrids over their corresponding number of gallons of fuel that was saved (the gasoline only model.11 reduction in demand) from the hybrid cars purchased in 2005 and 2006 was calculated. Further the number Annual Carbon Footprint Reduction of gallons saved was computed for the next nine years of the ten year economic life of the vehicle. Carbon Carbon Nitrogen Dioxide Monoxide Oxide Next, the average price per gallon of gasoline per (pounds) (pounds) (pounds) month was regressed against the number of gallons of gasoline that was sold per day for each month from Civic 2717 66 3 January 1993 until July 2007. The coefficient was then used to determine how much the price per gallon Prius 4915 66 3 was reduced by the drop in demand. An analysis of Camry 3124 66 3 variance of the regression equation yielded the following results: Highlander 4246 53 5 Regression Statistics Complicating the economic analysis of the public benefit of reducing pollution is complicated by the Multiple R 0.644069852 location where the vehicle is driven. The value of the reduction in pollution would likely be far greater in a R Square 0.414825974 heavily populated region like Los Angles than in relatively smaller area like New Haven, Connecticut. Adjusted R Also, while it is intellectually clear that reduced Square 0.4114238 pollution would lower health care expenses; the Standard science necessary for the calculation is not very well Error 0.3829028 developed. Further, the negative impacts of pollution may well be longitudinal and cumulative and Observations 174 difficulty to detect as they were with cigarette smoking.
Another public benefit of the gasoline savings is a reduction of the dependence upon foreign oil imports. This benefit is equally difficulty to compute. A case ANOVA can be made that if foreign oil imports were eliminated conflict in the Middle East would be Signifi- reduced and the United States could significantly cance reduce its military spending. df SS MS F F
Economic theory suggests that if the demand for a 9.10E- product is reduced, the price of that product will fall. Regression 1 17.9 17.9 121.9 22 Residual 172 25.2 0.15
11 The information in this chart was obtained by using Total 173 43.1 the Gas Mileage Impact Calculator found at: http://www.hybridcars.com/calculator/
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The calculation of the public benefit of the tax credit gasoline prices to the general public resulting from a yielded the following: drop in demand for hybrid owners. However, the cost-benefit of the tax credit may be significantly Public Benefit understated by this research methodology. A hidden of Gasoline assumption behind this methodology is that the Credits Paid Savings purchaser of the hybrid electric first decided to choose between the gasoline only option and the
hybrid option. It may well be that the purchaser of 2005 $340,031,250 $133,126,698 the hybrid car is exchanging a vehicle with much poorer mileage for the hybrid model, The gallons 2006 $595,613,669 $357,093,277 saved and the corresponding benefit to the pubic would be significantly greater. For example, CONCLUSIONS exchanging a Buick LaSabre for a Honda Civic would result in a much greater mileage benefit. As gasoline prices continue to climb, the economic case for the purchase of hybrid-electric technology It is also possible if the environmental benefits could becomes generally more evident. Already at current successfully be quantified in dollar terms, the public prices, four hybrid-electric vehicles have enough health benefits may be enough to significantly lower gasoline savings to offset the premium necessary to the gap between the costs and benefits. purchase the hybrid model without a tax subsidy in the form of a tax credit. The choice of one of the Finally if it was possible to economically quantify the smaller hybrids such as the Prius, Civic, or Camry is military cost savings from a reduced dependence on even more obvious in a commuting urban foreign oil imports, the gap could be eliminated. environment.
It is hard to justify tax credits for the purchasers of hybrid-electric cars based solely on the reduction in
Dr. Jerry Belloit is a Professor of real estate and the chairperson of the department of finance at Clarion University of Pennsylvania. He received his PhD in real estate and urban analysis from the University of Florida. In addition to real estate, his research interests include alternative energy, financial institutions, personal finance, tax and legal topics.
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DOES THE SALE OF SUBDIVIDED LAND CREATE CAPITAL GAIN OR ORDINARY INCOME? Jerry Belloit, Clarion University of Pennsylvania Anthony Grenci, Clarion University of Pennsylvania
ABSTRACT
Section 1221 of the Internal Revenue Code classifies the sale of subdivided land as the sale of real property held primarily for sale to customers in the ordinary course of business. Therefore, the general rule for the sale of subdivided land is that any gain is treated as ordinary income. However, Section 1237 contains a special rule that allows taxpayers to sell subdivided land and avoid ordinary income treatment of the gain.
Real estate and tax professionals should be aware of the requirements that must be met in order to qualify for Section 1237 capital gains treatment. Even when the requirements are met, a part of the gain will be treated as ordinary income if six or more lots are sold from the subdivision. This paper explains the requirements that satisfy capital gains treatment under Section 1237, and the implications of ordinary income treatment when six or more lots are sold.
INTRODUCTION When a capital asset that has been held longer than one year is sold for a gain, the federal income tax Investors are generally aware of the income tax savings can approach 60 percent for those in the top benefits of long-term capital gain treatment. In tax bracket. If a taxpayer in the highest tax bracket general, if a capital asset that has been held for more sells a long-term capital asset and recognizes a than one year is sold for a gain, then that gain is taxed $10,000 gain, they will pay only $1,500 in federal at a rate of 15 percent for any taxpayer in the 25 income tax instead of the $3,500 that would have percent or higher tax bracket. If a taxpayer is in the been paid had the capital gains income been ordinary 10 percent or 15 percent tax bracket then they pay income. That $2,000 savings on a $3,500 tax only 5 percent tax on long-term capital gains. Long- represents a more than 57 percent decrease in tax. term capital gains tax treatment has the potential to generate huge tax savings, and is available on the sale THE TAX TRAP OF LAND SUBDIVISION of any capital asset. Without prior warning investors may be inclined to The definition of a capital asset under Internal believe that the sale of subdivided land held long- Revenue Code (IRC) Section 1221 is one of term will afford them the same capital gains benefits exception. Section 1221 defines a capital asset as all as would the sale of any other capital asset. This classes of property not specifically excluded. The belief is understandable due to the fact that the sale of general items that are commonly understood to be single parcel of undivided land held long-term will excluded from the capital asset category are those result in the desirable capital gains treatment. related to a trade or business. Specifically, buildings However, one of the exclusions listed in Section 1221 and equipment used in a trade or business (except as is subdivided land; therefore it is not treated as a allowed under IRC Section 1231), inventory held for capital asset. Since it is not a capital asset it will sale in a trade or business, and receivables are not receive ordinary income tax treatment. considered capital assets. Most all other assets, including stocks, bonds, and other assets held for In Section 1221 the Internal Revenue Service (IRS) investment purposes, are capital assets. takes the position that the sale of subdivided land falls under the category of real property held
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primarily for sale to customers in the ordinary course If subdivided land does not qualify under Section of business. This position makes subdivided land 1237, then all gains are treated as ordinary income. comparable to inventory, and the sale of inventory For example, with sales proceeds of $100,000 a cost results in ordinary income treatment instead of the basis of $60,000 and real estate commissions of more beneficial capital gains treatment. $5,000 paid to sell the property, all lots sold will result in ordinary income totaling $35,000. POTENTIAL TAX RELIEF Example 2 – Sale of Subdivided Land That Section 1237 of the Internal Revenue Code provides Qualifies under Section 1237: Complete Relief potential tax relief for those selling subdivided land. Section 1237 states that to receive capital gains If subdivided land does qualify under Section 1237, treatment, taxpayers must first meet the following then it is possible to have all income treated as long- four conditions: term capital gain. For example, with sales proceeds of $100,000 a cost basis of $60,000 and real estate 1. The taxpayer cannot be a dealer in real commissions of $5,000 paid to sell the property, all estate. lots sold will result in long-term capital gains 2. The taxpayer cannot be a corporation. 3. The taxpayer cannot make substantial treatment totaling $35,000. Even starting with the improvements to the lots. year the sixth lot is sold, five percent of the sales 4. The taxpayer must hold the property for five price, or $5,000 in ordinary income will be offset years before selling the lots. with the $5,000 cost of sales.
A few elaborations on the above list are necessary. Example 3 – Sale of Subdivided Land That First of all, filling, draining, clearing and leveling are Qualifies under Section 1237: Partial Relief not typically considered to be substantial improvements. Substantial improvements typically If subdivided land does qualify under Section 1237, involve the installation of roads, utilities, or some then it is possible to have some income treated as other major addition to the land. Secondly, if long-term capital gain. For example, with sales property is inherited then the five year holding proceeds of $100,000 a cost basis of $60,000 and real requirement does not need to be met. estate commissions of $3,000 paid to sell the property, all lots sold will result in long-term capital Even if these conditions are met, strict capital gain gains treatment totaling $33,000 and ordinary income treatment will cease in the year that the sixth lot is of $2,000. Starting with the year the sixth lot is sold, sold. In the year that the sixth lot is sold and for five percent of the sales price, or $5,000 in ordinary every year after that, five percent of the sales price of income will be partially offset with the $3,000 cost of the lot will be treated as ordinary income. However, sales, leaving $2,000 in ordinary income. any costs of selling the property incurred in that year are used first to reduce the ordinary income. Any Example 4 – Sale of Subdivided Land That remaining income from the sale receives long-term Qualifies under Section 1237: No Relief capital gains treatment. If subdivided land does qualify under Section 1237, EXAMPLES then it is possible to have none of the income treated as long-term capital gain. For example, with sales Following are comparative examples of possible proceeds of $100,000 a cost basis of $95,000 and no income tax treatment from selling subdivided land real estate commissions paid to sell the property, all under varying circumstances. lots sold will result in ordinary income totaling $5,000. If the sixth lot is sold in the first year, five Example 1 – Sale of Subdivided Land that does percent of the sales price or $5,000 will be treated as not Qualify under Section 1237 ordinary income.
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In the above examples, if six or more lots are not sold For real estate dealers, corporations, those who wish in the first year, then all lots sold until the sixth lot is to or need to sell earlier than the five year holding sold will receive long-term capital gains treatment. period, and those that wish to make substantial The ordinary income treatment begins only once the improvements to the subdivided land, it is imperative sixth lot is sold. that allowances be made for the fact that some or all of the gain may be treated as ordinary. CONCLUSIONS REFERENCES Income tax professionals, investors, and real estate professionals need to be aware of the potential 26CFR1.1221-1 General Rules for Determining income consequences of selling subdivided land. Capital Gains and Losses – Meaning of terms. With proper planning, most importantly adhering to Internal Revenue Service, Department of the the five year holding period and the avoidance of Treasury. substantial improvements, the non-corporate, non- real estate dealer taxpayer can still benefit from the 26CFR1.1237-1 Real property subdivided for sale. advantageous long-term capital treatment of much of Internal Revenue Service, Department of the the gain. Treasury.
Dr. Jerry Belloit is a professor of real estate and the chairperson of the department of finance at Clarion University of Pennsylvania. He received his PhD in real estate and urban analysis from the University of Florida. In addition to real estate, his research interests include alternative energy, financial institutions, personal finance, tax and legal topics.
Anthony F. Grenci is a professor of accountancy at Clarion University of Pennsylvania, Clarion, PA. He received his Ph.D. in accounting from the University of Pittsburgh. His other research interests include various applications of Benford‘s Law, taxation, and information technology.
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A BINARY CHOICE MODEL FOR PREDICTING BANK ACQUISITIONS John S. Walker, Kutztown University of Pennsylvania Karen L. Randall, Ursinus College Henry F. Check, Jr., Kutztown University of Pennsylvania
ABSTRACT While banking may be a mundane business, decades of deregulation and rampant merger and consolidation activity have made the banking industry a very interesting industry to study. The subject of bank mergers is sure to attract the attention of any group of bank executives. Some banks are seeking merger candidates, some are seeking to be acquired, and some are attempting to position themselves to avoid being acquired. This paper presents three binary choice models – linear probability, probit, and logit – which can be used to quantify the likelihood of a bank‘s acquisition. The models use readily available financial data as predictors. As is the custom, the models are tested to determine their predictive capacity. The data set used is for mergers that occurred in 2004. Ex post, the models successfully ―predict‖ over 70 percent of the mergers that actually occurred. Further, the models successfully predict mergers that occurred in 2006 and 2007. Finally, the models are used to identify candidate banks for mergers that have not yet occurred. Since the mathematical nature of binary choice models makes interpretation of the coefficients difficult, an index called the WRC Index is proposed. This Index, which is bounded by –3 and +3, indicates the likelihood of acquisition and can be used by banks to identify acquisition targets and by banks wishing to increase or decrease their attractiveness to potential suitors.
INTRODUCTION and are somewhat difficult to interpret. Unlike the linear probability model, the output probabilities of Binary choice models are used to model events which the model are constrained to the zero-to-one range. have two outcomes, in our case the acquisition or The probit model is based upon the standard normal non-acquisition of a bank. The output of the models distribution: is the probability of a bank‘s acquisition. 1 2 x ex 2 We examined three binary choice models: the linear 2 probability model, the probit model, and the logit model. The binary choice model is estimated using The logit model is also estimated using the maximum the familiar ordinary least squares (OLS) method. likelihood methodology. The coefficients of the The coefficients of the model are the change in the model again are the change in the natural log of the dependent variable per unit change in each odds ratio per unit change in each independent independent variable and are thus easy to interpret. variable and are somewhat difficult to interpret. The However, the binary choice model can give output output probabilities of the model are also constrained values that lie outside of the meaningful zero-to-one to the zero-to-one range. The logit model is based range and therefore cannot be precisely interpreted as upon the logistical distribution: probabilities. ex The probit model is estimated using the maximum x 2 likelihood methodology. The coefficients of the 1 x e model are the change in the natural log of the odds ratio per unit change in each independent variable
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As an example of the nature of the probit and logit Austria. The Austrian banking system had long been model coefficients, suppose that the probability of highly fragmented not only by region but by function precipitation is 80 percent. Then the odds of as there existed commercial banks, mortgage banks, precipitation are 0.80/(1–0.80) = 4 and the natural savings banks, and cooperative banks. In a country of logarithm of 4 is 1.39. Since probabilities are just eight million people, there were some 1,200 bounded by zero and one, probit and logit models banks and 4,500 branches. Egger and Hahn discuss produce outputs which are roughly bounded by –3 the expected benefits of consolidation in terms of and +3. These predicted values can be readily economies of scale and economies of scope. Changes converted to probabilities by individual calculation, in bank regulations resulted in a wave of mergers by using a spreadsheet, or most statistical software during the 1996 to 2002 period of their study. They capable of maximum likelihood can convert outputs modeled efficiency effects by examining the cost-to- into probabilities, but the problem of interpreting the income ratio and return on employee (operating coefficients remains. revenue per employee). Profitability effects were examined through the ―net revenue ratio‖ (net LITERATURE REVIEW revenue divided by equity) and return on equity. While similar studies of U.S. banks have failed to Mergers in general identify efficiency or profitability gains, Egger and Palepu (1986) is a thorough discussion of the six Hahn do find such gains and identify a size effect. frequently cited merger target characteristics Small, regional banks exhibit both efficiency and hypotheses: inefficient management, growth-resource profitability gains in both the short and long run. imbalance, industry disturbance, firm size, asset Larger, national banks only exhibit gains in the long undervaluation (represented by the market value to run. Egger and Hahn attribute the difference to the book value ratio), and price-earnings ratio. Using 163 market power gained by merging within a relatively acquired firms and 256 randomly selected non- small region. acquired firms from 1971 through 1979, an Hannan and Pilloff (2006) examine mergers which acquisition model was estimated. Palepu was occurred in the United States following passage of interested in testing previous claims that such models the Riegle-Neal Act of 1994 which relaxed the could predict acquisitions more accurately than restrictions on interstate acquisitions. They identify financial markets did. However, he concluded that differences between in-region and out-of-region investing in predicted targets did not yield acquisitions and between rural and urban acquisitions statistically significant excess returns. as well as a size effect. Much discussion is devoted to Hasbrouck (1985) uses a sample of 86 target firms, the distinction between a merger and an acquisition, 172 size-matched firms, and 172 industry-matched and to ―hybrid‖ circumstances such as merging banks firms to identify common characteristics of target which are both owned by the same bank holding firms. The sample is taken from mergers that company and ―changes of control‖ where ownership occurred between 1976 and 1981. Statistical changes but the bank continues to operate significance is found for q assets (market value of independently. Previous studies are cited, such as liabilities + market value of equity)/(replacement Hadlock, Houston, and Ryngaert which attributed value of assets) and q equity (market value of acquisitions to seizing favorable opportunities ahead equity)/(replacement value of assets – market value of the competition, and Moore who attributed of liabilities). acquisitions to the target‘s (low) profitability and (low) capital-asset ratios. Egger and Hahn use the Mergers in banking competing risk proportional hazard model, a type of multinomial logit model previously used by Egger and Hahn (2006) examine the effects of Wheelock and Wilson, and data from SNL Financial mergers on bank efficiency and profitability in for the 1996 through 2003 timeframe. They were able
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show the statistically significant effects of return on number of acquisitions of banks has been roughly assets and efficiency on the likelihood of a bank four times the number of failures, Wheelock and being acquired and further demonstrated that in- Wilson used competing risks proportional hazard region acquirers where better able to identify models to examine the determinants of bank failures inefficient targets. and acquisitions within the United States. They studied the effects of capital, assets, earnings, Koetter, Bos, Heid, Kool, Kolari and Porath (2005) liquidity, and miscellaneous factors such as studied the consolidation of the German banking branching on the failure or acquisition of banks. industry where the number of banks decreased from However, their studies primarily focused on the role 3,785 to 2,911 between 1995 and 2000. Their study of managerial inefficiency in the failure or investigates five possible consolidation events that acquisition of banks. There are two traditional ways include, distressed and non-distressed targets (banks of measuring efficiency: the production approach and being bought), distressed and non-distressed the intermediation approach. In the production acquirers (banks buying other banks), and banks approach, bank production is measured in terms of subject to regulatory intervention. Their study also the numbers of loans and deposit accounts serviced, predicts the probability of becoming a distressed and thus only includes operating costs. In the target, a distressed acquirer, or a bank that intermediation approach, output is measured in terms experiences intervention but continues to function. of dollar amounts of loans and deposits and thus The main financial variables utilized are capital includes both costs and technical expenses. Failing adequacy, asset quality, management quality, banks were more cost inefficient than surviving earnings record, liquidity position (the CAMEL banks. However, acquired banks were less cost variables), size, holding company, branching status, inefficient than surviving banks, and often the and age. Using the competing risk proportional differences in cost inefficiency between acquired and hazard model they find several indicators of target surviving banks were statistically significant. attractiveness including that decreasing cost and profit efficiency leads to higher probabilities of Hughes, Lang, Mester and Moon (1999) observe that becoming involved in a distressed event and in the 14-year period beginning in 1980 there were becoming a target. 6,347 bank mergers and that 43% of all banks were involved in a merger either as an acquirer or as an Akhigbe, Madura, and Whyte (2004) used a sample acquired. Motivation for mergers include increases in of 254 bank mergers between 1987 and 2001 to find expected profit, increases in efficiency, and decreases that acquisitions of underperforming banks are in insolvency risk. Indicators of attractive target anticipated by the equity markets. They find that banks are asset size, number of branches, deposit target banks‘ stock value increases in the year dispersion, and the number of states in which the preceding acquisition. Thus, prior studies, which target is located. focused on the change in stock value following the acquisition announcement, missed much of the effect. DeLong (2001) uses standard event study Indicators of attractiveness include bank size (large is methodology to examine the wealth effect of bank better), low return on assets, high equity/assets, and a mergers by classifying bank mergers as focusing or high core deposits ratio. diversifying. Both focusing and diversifying are assigned two dimensions, activity and geography. Wheelock and Wilson (2000) focused on the role of Mergers that focus both activity and geography are managerial inefficiency in the failure or acquisition found to generate abnormal returns of approximately of banks. Banks that are poorly managed are 3 percent upon announcement. The abnormal returns commonly thought to be prone to failure, and, if the are found to be directly related to target size relative cost of reorganizing the bank is low, prone to to bidder size. Other types of bank mergers do not acquisition as well. Noting that since 1984 the exhibit these effects.
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A study by Amel and Rhoades (1989) dates from a and target attractiveness were found to be directly time of very different banking industry regulation, related but not statistically significantly so. 1978 to 1983. Nevertheless, they found 1,724 bank mergers to examine. In addition to studying a Dietrich and Sorensen (1984) used data from four different time and regulatory period, Amel and industries (food and beverages, chemicals, Rhoades give equal attention to the nature of acquirer electronics, and transportation) and a sample size of and acquired utilizing multinomial logit and cross- 90 consisting of 30 merged firms and 60 randomly sectional analysis. Before ultimately concluding that chosen non-merged firms from the period from 1969 no single motive drove the high levels of mergers to 1973. By standardizing descriptive variables seen during the period of 1978-1983, they include within industries, they were able to identify five such variables in their study as asset growth rate and statistically significant merger predictors including market share. Their evidence does suggest that large leverage and assets turnover, which was their proxy banks and small banks are less likely to be acquired for efficiency. than medium-sized banks. The sample sizes in these studies is important. Binary Logit models applied to mergers choice models are often characterized as ―large‖ sample models with exact specification of what Adelaja, Nayga, and Faroq (1999) focus on mergers constitutes ―large‖ left unspecified. All three of the in the food industry and create two logit models, one above studies utilize samples which are either smaller to represent target behavior and another to represent that ours or comparably sized. bidder behavior. Data was available for 28 merged firms and 77 control sample firms for the period METHOLOGY AND RESULTS January 1985 through December 1994. Their target Our models were estimated using financial data from model involves 16 variables, only five of which are the last six months of 2004. That date was chosen so statistically significant. Of the five statistically as to provide an opportunity to test the predictive significant variables, only three had the expected capacity of the model using financial data from 2005 signs. The bidder model could not be reliably and 2006 and mergers that were known to have estimated due to non-convergence attributed to small occurred in that timeframe. The data was obtained sample size. from SNL Financial. Its database was searched for Gonzalez, Vasconcellos, and Kish (1998) examine mergers that occurred during the second half of 2004 cross-border mergers using a sample of 292 mergers and 150 mergers were identified. We also selected a from the 1981-1990 timeframe. The motivation for random sample of 150 non-merged banks from that their study was the observation that during that same timeframe. The sampling process produced 16 period of time the number of foreign acquisitions of duplicates so our sample consisted of the 150 merged American firms exceeded the number of American and 134 non-merged banks. acquisitions of foreign firms, thus reversing the Several combinations of predictive variables were previous pattern. Using logit analysis they were able tested. The combination which resulted in the best fit to demonstrate a number of characteristics which across the three models was: the deposits to total made a target attractive, such as undervaluation and assets ratio, the noninterest income to total assets managerial inefficiency. ratio, the efficiency ratio, return on average assets The Kim and Arbel (1998) study focuses on the (ROA), and return on average equity (ROE). The hospitality industry and 161 mergers which occurred efficiency ratio is defined as: between 1980 and 1992. Nine characteristics were Noninterest Expenses studied and four found to be statistically significant Efficiency Revenue including managerial inefficiency. Financial leverage
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and, in banking, revenue equals net interest income Table 4 plus non-interest income. Summary of Model Coefficients
Tables 1, 2, and 3 below show the results obtained Non- Deposits interest Efficiency ROA ROE for the three models. The coefficients‘ signs are Assets consistent across the models and the p-values are Income Linear remarkably good. Table 4 summarizes the 0.83 –0.18 0.70 0.27 –0.16 Probability coefficients from the three models. Probit 2.29 –0.75 2.05 0.75 –0.04 Table 1 Linear Probability Model Logit 4.07 –1.36 4.92 1.48 –0.08
Non- Deposits interest Efficiency ROA ROE The regression coefficient signs are consistent with Assets Income our a priori expectations except for the ROE Coefficient 0.83 –0.18 0.70 0.27 –0.16 coefficient. A positive sign on the deposits to assets ratio indicates that a higher proportion of deposits Standard 0.28 0.03 0.23 0.08 0.01 Error favors acquisition. The positive sign on the efficiency variable indicates that inefficiency favors acquisition. t–Statistic 2.92 –5.31 3.06 3.46 –2.80 The positive sign on the ROA variable indicates that p Value 0.0037 0.0000 0.0024 0.0006 0.0054 a high ROA favors acquisition and the negative sign
on the ROE coefficient indicates that a low ROE favors acquisition. Table 2 Probit Model The negative sign on the noninterest income variable (which is actually noninterest income as a proportion Non- Deposits of assets) indicates lower noninterest income favors interest Efficiency ROA ROE Assets acquisition. Based on our research and discussion Income with bankers, we believe that a positive or negative Coefficient 2.29 –0.75 2.05 0.75 –0.04 sign could be explained. The majority of most banks‘ Standard revenue comes from net interest income, which is 0.85 0.16 0.72 0.24 0.17 Error sensitive to changes in interest rates. Specifically, z–Statistic 2.70 –4.84 2.84 3.07 –2.30 when the yield curve becomes flatter, banks‘ spreads and margins come under pressure. Therefore, banks p Value 0.0068 0.0000 0.0045 0.0021 0.0216 look to noninterest income – both fee income and
other noninterest income – to not only contribute to Table 3 revenue, but also to serve as a hedge. Noninterest Logit Model income, such as financial planning services and safe deposit box fees, tends to be less interest-rate Non- Deposits sensitive. Looking at it from this angle, a bank with a interest Efficiency ROA ROE Assets healthy portfolio of noninterest income might be Income considered an attractive target. Thus, one would Coefficient 4.07 –1.36 4.92 1.48 –0.08 expect a positive sign for noninterest income in our Standard models. 1.61 0.28 1.46 0.43 0.02 Error On the other hand, anecdotally we learned from a z–Statistic 2.54 –4.78 3.37 3.42 –2.68 bank CEO, who was directly involved in M&A p Value 0.0112 0.0000 0.0008 0.0006 0.0073 activity after his bank was acquired, that banks
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sometimes shy away from acquiring other banks that logit result for predicting mergers that might occur have a lot of noninterest income. The reasoning is after 2004. that many of the noninterest income businesses, such as travel agencies, insurance companies, and others, The WRC Index contribute not just revenue, but sometime a Since the dependent variable in a logit model is disproportionate amount of overhead. An acquiring difficult to interpret as are the model coefficients, we bank often has made different decisions about what propose the WRC Index to indicate the likelihood of noninterest income businesses are optimal and a bank being an acquisition target. The WRC Index is complementary to its core business of net interest bounded by –3 and +3, where –3 is very unlikely, income. That leaves them in the position where they zero is neutral, and +3 is very likely. The coefficients take ownership of costly noninterest income of the logit model are now changes in the WRC businesses that need to be trimmed or eliminated Index. In its effort to maximize shareholder wealth, a after an acquisition. This can be costly and/or bank seeking acquisition targets can use the logit detrimental to moral, post acquisition. From this model and the WRC Index to identify suitable perspective, a negative sign on the noninterest candidates. Similarly, a bank wishing to become income variable would seem logical. more or less attractive as an acquisition target, can Since ROA and ROE generally vary directly, one concentrate its efforts on the characteristics that will might expect their signs to agree. Return on assets have the most impact on its attractiveness. and return on equity are related through the equity Using 2005 financial data and our logit model, we multiplier, assets divided by equity: identified the following acquisition candidates: Assets ROE ROA Table 5 Equity Predicted Merger Candidates from 2005 Data Thus, the regression coefficient signs are indicating WRC that acquisition is favored in low equity multiplier Name Probability Index circumstances, where equity is a high proportion of assets, i.e., an under-levered bank. Our model Towne Bancorp, Inc. 1.41 80% identifies attractive targets as those which are Golden State Business inefficient and under-levered, two circumstances that 0.51 62% Bank would likely be readily remediable by an acquirer. Diablo Valley Bank 0.40 60% Since the traditional goodness of fit measure, the 2 coefficient of determination R , does not apply to Summit Bank 0.27 57% binary choice models, it is customary to use the Clover Leaf Financial proportion of correct predictions in the original data 0.27 57% set as a measure of goodness of fit. Each of our Corp. models successfully predicted more than 70 percent Globe Bancorp, Inc. 0.24 56%
of the acquisitions in the 2004 data set:
Linear Probability: 73.94% Probit: 73.94% A search through the banking industry news section Logit: 75.00% of the SNL Financial database produced the following three announcements: Given the slightly better goodness of fit and the fact that logit models are more robust to potential non- normality in the data than probit models, we used the
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Thrift – Mergers and Acquisitions Thus, as of this writing in October 2007, three of the six predicted acquisitions have been announced. Clover Leaf deal gives First Federal opportunity to deploy excess capital Using 2006 financial data and our logit model, we identified the acquisition candidates in Table 6. As of March 15, 2006 5:49 PM ET this writing in October 2007, none of these acquisitions has occurred. By Diana Finkel Table 6 As a way to deploy excess capital from its 2004 Predicted Merger Candidates from 2006 Data initial public offering, First Federal Financial Services Inc. (MHC) sought an acquisition and WRC Name Probability found a willing, suitable and convenient merger Index candidate just around the corner in a fellow Edwardsville, Ill.-based thrift, Clover Leaf Pacific West Bank 2.69 94% Financial Corp., according to a Form S-4 filed Noble Community 0.97 72% March 14. Bank
Bank & Thrift – Mergers and Acquisitions Pacific Valley Bank 0.62 65%
Deal Profile: New Orleans investor group enters Pan Pacific Bank 0.31 58% into letter of intent to acquire Globe Bancorp California Business 0.29 57% February 14, 2007 4:48 PM ET Bank
By Thomas Orgren CONCLUSIONS AND IDEAS Globe Bancorp Inc. said Feb. 14 that it entered FOR FUTURE RESEARCH into a letter of intent in which a New Orleans investor group will acquire the company and unit Globe Homestead Savings Bank for a cash price It is clear from the number of acquisition candidates to be determined. that our model is predicting compared to the total Bank – Mergers and Acquisitions number of acquisitions that we are identifying only one type of acquisition, that of the inefficient, under- Diablo Valley Bank shareholders approve sale levered target. Further work is need to expand the to Heritage Commerce scope of our predictive capability. Multinomial logit and cross-sectional analysis, as used by Amel and June 14, 2007 4:41 PM ET Rhoades, can extend our predictive capability and identify changes over time in the predictors. Further, By Mike Layfield a multivariate logit model offers the possibility of Shareholders of Danville, Calif.-based Diablo matching potential acquirers and targets. Valley Bank ($254.6 million) approved the REFERENCES company‘s acquisition by San Jose, Calif.-based Heritage Commerce Corp. ($1.07 billion), the Adelaja, A., Nayga Jr., R., & Faroq, Z. (1999). companies said June 14. Predicting mergers and acquisitions in the food industry. Agribusiness. 15(1). 1-23. The transaction has received all necessary regulatory approvals and is expected to close by Akhigbe, A., Madura, J. & Whyte, A. M. (2004). the end of June. Partial anticipation and the gains to bank merger
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targets. Journal of Financial Services Research. Hasbrouck, J. (1985). The characteristics of takeover 26(1). 55-71. targets: q and other measures. Journal of Banking and Finance. 9. 351-362. Amel, D. F. & Rhoades, S. A. (1989). Empirical evidence on the motives for bank mergers. Eastern Hughes, J. P., Lang, W., Mester, L. J. & Moon, C. Economic Journal. 15(1). 17-27. (1999). The dollars and sense of bank acquisitions. Wharton Financial Institutions Center Working Paper DeLong, G. L. (2001). Stockholder gains from 99-04. focusing versus diversifying bank mergers. Journal of Financial Economics. 59, 221-252. Kim, W. G. & Arbel, A. (1998). Predicting merger targets of hospitality firms (a logit model). Dietrich, J. K. & Sorensen, E. (1984). An application Hospitality Management. 17, 303-318. of logit analysis to prediction of merger targets. Journal of Business Research. 12. 393-402. Koetter, Michael, Bos J. W. B., Heid F., Kool C. J. M., Kolari J. W. & Porath D. (2005). Accounting for Egger, P. & Hahn, F. R. (2006). Endogenous bank Distress in Bank Mergers. Discussion Paper Series 2: mergers and their impact on banking performance. Banking and Financial Studies No. 09/2005. WIFO Working Papers, No. 271. Deutsche Bundesbank.
Gonzalez, P., Vasconcellos, G. M. & Kish, R. J. Palepu, K. G. (1986). Predicting takeover targets: a (1998). Cross-border mergers and acquisitions: the methodological and empirical analysis. Journal of undervaluation hypothesis. The Quarterly Review of Accounting and Economics. 8. 3-35. Economics and Finance. 38(1). 25-45. Wheelock, D. C. & Wilson, P. W. (2000). Why do Hannan, T. H. & Pilloff, S. J. (2006). Acquisition banks disappear: the determinants of U.S. bank targets and motives in the banking industry. Federal failures and acquisitions? Review of Economics and Reserve Board, Washington, D.C. Working Paper Statistics. 127-138. 2006-40.
John S. Walker is an associate professor of accounting and finance at Kutztown University of Pennsylvania. He holds masters degrees in Chemical Engineering from the University of Delaware and in Business Administration from Lehigh University, where he earned his Ph.D. in Business and Economics. He is a Chartered Financial Analyst and spent 12 years as director of research for a bank advisory firm. He is co-author of a monograph titled A Financial-Agency Analysis of Privatization: Managerial Incentives and Financial Contracting. His research interests include privatization, banking, and portfolio management.
Karen L. Randall is a visiting assistant professor of business and economics at Ursinus College. She received her PhD in Business and Economics from Lehigh University. Her other research interests are public pension plan performance, microfinance, and environmental economics.
Henry F. Check, Jr. is an instructor of accounting and finance at Kutztown University of Pennsylvania. He received masters degrees in Business Administration and in Economics from Lehigh University. His other research interests are firms with dual-class common capitalizations, the effect of dividend initiations on systematic risk, and public pension plan performance.
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DOES YEAREND PORTFOLIO RESTRUCTURING BY COMMUNITY BANKS BOOST SHAREHOLDER RETURNS? John S. Walker, Kutztown University of Pennsylvania Henry F. Check, Jr., Kutztown University of Pennsylvania
ABSTRACT Despite decades of deregulation and rampant merger and consolidation activity, a significant portion of our economy‘s banking services is provided by community banks. Like all banks, community banks have faced increasing pressure on their ability to operate profitably. A common practice among banks to increase net interest income is increasing the duration of their investment portfolio, a practice referred to as ―riding the yield curve.‖ However, for approximately the last three years, the U.S. Treasury yield curve has become remarkably flat, thus providing no additional yield for the increase in maturity risk borne by the bondholder. Nevertheless, some banks have announced restructurings of their investment portfolios in an apparently vain attempt to increase profits and the value of their stock. This paper examines a sample of community banks which announced such restructurings in the last three years. The stock returns of the sample are found to have decreased from their pre-restructuring levels by a statistically significant amount. Further, the post-restructuring returns are found to be statistically significantly negative. The sample of restructuring banks is compared to the NASDAQ Bank Index, to the America‘s Community Bankers‘ Index, and to two control samples chosen randomly from the same population of community banks. The two control samples had statistically significant negative returns over the period, and the negative returns of the two control samples were larger (more negative) than the restructuring banks. The conclusion reached is that the restructurings were beneficial to the stockholders of the community banks despite the flat yield curve.
INTRODUCTION years to fully achieve. In contrast, a bank‘s investment portfolio can be restructured Figure 1 shows the broad asset allocation between expeditiously if necessary. loans, investments and cash for community banks with less than $5 billion in total assets. In this study Figure 1 we define community banks as those with total assets Asset Allocation for Community Banks (2006) of less than $5 billion. The interest income that a Investments, 19% bank earns from its loan and investment portfolios is Loans, 73% vital to its profitability as an ongoing concern. Generally, in the event that management is dissatisfied with performance, a bank‘s investment portfolio can be restructured far more easily than its loan portfolio, as investments are relatively liquid and can be sold in the secondary market within a Cash, 8% short time frame. Banks can also sell loans, but the securitization process is slow and many loans are nonconforming and not very liquid. If a bank‘s loan portfolio is performing below expectations, desired Source: SNL Financial changes to structure and rates take months if not
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Banks will sometimes elect to restructure their sense to reduce risk if the bank was not receiving investment portfolio at yearend in order to lay the sufficient compensation from the risk or had groundwork for stronger earnings in the upcoming exceeded its risk limit, as outlined in policy. year. Usually, this decision is made because the portfolio contains a block of investments that are Frieder and Hedges (1994) discuss portfolio below market yields. When these securities are sold, restructuring in a holistic context, from a strategic the bank reports the losses in the current year. Often planner‘s perspective. They give a list of ―seven key the funds are reinvested into higher-yielding areas‖ [of capabilities] that management teams need securities that serve to increase interest income and in order to build value for their banks, such as earnings. There is an identifiable cost and benefit to expertise in executing value-enhancing mergers and portfolio restructuring, so is there a net benefit? Our acquisitions. One specific piece of advice offered for research looks at whether these restructurings are bank management is that in order to ―increase market effective at improving shareholder returns. approval, they should view portfolio restructuring as possibly the quickest and most substantive way to LITERATURE REVIEW strengthen profitability.‖ In practice the securities portfolio can be restructured much more quickly than As this appears to be a new area of research, we the loan portfolio. One of the banks that announced a conducted a very thorough literature review. Further, 4Q06 restructuring, Yardville National Bank, later we felt it important to differentiate between the announced in the 2Q07 its acquisition by PNC. This literature targeted at bank managers and that written is an example of a bank that might have used primarily for academic researchers. portfolio restructuring as one tactic for positioning itself for acquisition. Practitioners Literature De Meo (1995) recounts the restructuring done by Pickering and Kalishek (1993) discuss the securities Barnett Bank in the mid 1990s to lower its interest transaction documentation needed in order to avoid rate risk. When Statement of Financial Accounting regulatory scrutiny. This should include: 1) a Standards No. 115 (SFAS 115) was implemented, rationale for the transaction; 2) a description of the banks began to carefully monitor the duration of the securities involved; and 3) an analysis of the available-for-sale (AFS) investment portfolio because transaction‘s consequences. They believe that changes in portfolio value were marked to market portfolio restructuring can be justified when it serves and recorded on their balance sheets. By limiting the to reduce interest rate risk, to improve yields, or to duration of the AFS portfolio, this constrained the liquidate nonperforming securities. Pickering is a potential volatility of the banks‘ equity account. In securities broker who typically publishes his articles the case of Barnett Bank, not only did the bank in trade publications. Therefore, he cannot be reduce its portfolio duration, but it also shrank the considered an objective observer of the securities portfolio as it used the cash flow to supplement its market. Nevertheless, his writings give us a glimpse shortfall in deposit funding. Since the implementation into the information sent to bankers that could of SFAS 115, banks have become more comfortable influence their decisions. with using the AFS classification. In fact, the In our research, we are looking at banks that allocation between AFS and held-to-maturity (HTM) restructure in order to improve yields or to strengthen accounts tends to be heavily tilted toward AFS, with their margin by eliminating assets and liabilities that infrequent shifts of any significance. There is no are generating a negative spread. It is also possible indication that the restructurings that we analyzed in that these restructuring transactions reduce a bank‘s our research were motivated by SFAS 115 interest rate risk. On the surface, reducing risk sounds considerations. like a constructive measure to take. Yet, banks are in the business to take risk; thus, it would only make
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Pickering (2001) explains that banks tend to take scenario, the logic is that the bank is already having a ―bond swap losses‖ at yearend ―if the year promises poor year, which is likely reflected in the stock price to be exceptionally profitable or exceptionally and investor sentiment. By taking losses prior to unprofitable.‖ The title of the article is ―Cleaning yearend to increase the portfolio yield, this shifts house: Year-end 2001 is a great time to restructure additional income to future years. The stock market is your bank‘s portfolio.‖ This article, which is valuing companies based on current and future published in his organization‘s trade magazine earnings prospects. Therefore, there is some appeal to Independent Banker, provides insight into the tactics this argument of taking your lumps today for used by investment professionals to generate activity improved earnings in the future. However, it ignores (i.e., commissions) with their bank clients. Mr. the responsibility to the shareholders who might need Pickering manages ICBA Securities, a broker/dealer to liquidate their shares in the short term. Shifting that targets community banks. This article was short-term performance to the future implicitly published in October of 2001, so the intent was to assumes that current shareholders will remain alert bankers to the opportunity to restructure before invested in the bank long enough to benefit from a yearend. higher valuation sometime in the future.
One recommendation Pickering makes is to DeMasi (2006) writes about the interest-rate and restructure the portfolio when the bank‘s year is operating environment that characterizes the period shaping up to be ―exceptionally profitable.‖ This during which the restructuring activity that this implies that that bank is exceeding budget. The logic research examines has occurred. For example, he is that the restructuring enables a bank to take losses reports that between December 2002 and June 2006 in the current year and to reinvest into higher- the net interest margin for all insured banks (data yielding securities to improve earnings for the from the Federal Deposit Insurance Corporation) fell following year and beyond. If a bank is ahead of by 51 basis points. As with Pickering, DeMasi is an budget, it can use the surplus to offset the securities investment professional who serves the community losses, enabling the bank to still meet budget, which bank sector and is likely compensated from management often treats as the main objective for the commission-based business. He gives several basic year. guidelines that a bank should adhere to when they restructure the portfolio, such as setting a loss There are at least two possible fallacies to this logic. constraint. He defines a well-structured strategy as First, it assumes that exceeding budget does not one that has a break-even period that is shorter than benefit shareholders without taking action to capture the average life of the bonds being sold. He states the surplus and that bond swaps are one of the best that if this is accomplished, ―the restructuring should ways to lock in the benefit. A second potential fallacy provide a clear economic advantage to the bank is that the bank‘s value will be enhanced by this versus continuing to hold the current positions until restructuring. If this is true, then this should be they roll off of the portfolio.‖ One aspect of fixed- reflected in improved returns to shareholders. In our income investing that seems to be ignored in research methodology, we examine shareholder DeMasi‘s article is that bonds that are underwater returns before and after restructuring in search of will trend toward par value as time till maturity evidence that restructuring does indeed produce a diminishes. Thus, the paper losses that appear at a material improvement to shareholder returns. point in time will not be realized if the bonds are held to maturity, barring the unlikely occurrence of a The second scenario that Pickering believes is default. conducive to restructuring is when the bank is having a poor year, in this case termed ―exceptionally Academic Literature unprofitable.‖ The losses incurred from restructuring are seen as ―piling on‖ to the other bad news. In this Banz (1981) finds that the capital asset pricing model is misspecified because there is a ―size effect.‖ This
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effect, which is not linear, is seen with very small because the funds from the sale of securities can be firms, but much less so with average to large firms. used to prepay borrowings. He observes that the asset In our research, we are dealing with small firms, as and liability characteristics of financial intermediaries the data set includes all community banks with assets would seem to make them likely candidates for less than $5 billion. Banz found that smaller firms significant sensitivity to interest rate changes. have higher risk adjusted returns than larger firms, Neuberger reports that the evidence on the interest although he did not give a breakdown on asset size. rate sensitivity of financial intermediaries is mixed. Our guess is that our dataset falls well within the He cites two studies, one by Chance and Lane and small firm category. Banks are continually expanding another by Sweeney and Warga, that have found that their asset base, as they collect new deposits and financial institutions tended not to have consistent or write new loans. However, the time period used in significant sensitivity to changes in interest rates. our research is so brief that it is unlikely that any of the banks changes size by a sufficient amount to In contrast, Neuberger also reports that other affect returns because of a size effect. Our research researchers, citing Martin and Keown, Lloyd and methodology did not incorporate any adjustment for Schick, Lynge and Zumwalt, Beebe, Flannery and size, although we did test for a size effect. If our James, Booth and Officer, Kane and Unal, and analysis had looked at post returns over a much Neuberger, have found significant interest rate longer time frame, then perhaps we would have sensitivity at banks and thrifts. Researchers have needed to control for size. looked at bank operations, portfolio composition, and other market conditions to help explain the link Banz and Breen (1986) study the ―look-ahead bias‖ between the market and interest rate sensitivity and and an ―ex-post-selection bias‖ that can occur when bank stock returns. Specifically, Dietrich (also cited using the COMPUSTAT database or some other in Neuberger, 1992) uses a two-index approach to price/dividends/earnings (PDE) database. For explain the risk sensitivity of bank stocks as a example, they found that portfolios and portfolio function of bank balance sheet composition. Studies returns were different depending on whether they find some evidence that individual bank assembled portfolios using current or historical data characteristics affect the risk of bank stock returns. from COMPUSTAT. Our research utilizes SNL Financial‘s bank and thrift database. While this, Neuberger states that, ―Each asset in banks‘ obviously, is not COMPUSTAT, it falls into the portfolios may be considered to have its own broader category of a PDE database. Each database is associated market beta value. Thus, there may exist a subject to its own set of potential biases. One ‗beta‘ for making residential mortgage loans or a possibility of a bias in our research is that we similar measure for holding government securities.‖ analyzed those banks that showed a fourth quarter As we know from portfolio theory, the aggregate beta realized loss in their securities portfolios that also had that a bank exhibits will depend on the institution‘s a restructuring announcement that was captured by overall beta, which is a weighted average of the SNL. We are assuming that SNL is even-handed individual betas associated with the different assets in when it captures all announcements and that they are its portfolio. As the asset mix changes, so will the not introducing a potential bias pertaining to which bank‘s market risk. Under a restructuring scenario, it restructuring announcements are in their archives. is possible that a bank‘s weighted average beta rises, falls or remains steady, depending on the betas of the Neuberger (1992) examines how the composition of assets and liabilities bought and sold during the bank asset portfolios can alter the risk of a bank and, restructuring. In our analysis, we do not look at the thus, the returns. This is relevant to our research banks‘ betas before and after restructuring nor do we because restructuring will change the asset portfolio, know whether the restructured balance sheets for the specifically the composition of the investment banks studied are riskier or less risky than the pre- portfolio. It can also change the liability portfolio, restructured balance sheets.
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Allen and Saunders (1992) found evidence of a Beaver et al. (1992) believe that dysfunctional systematic upward window dressing adjustment on behavior ―such as gains trading [by banks] appears to the last day of each quarter. They examined data be a by-product of the information asymmetry between 1978 and 1986 and 75 percent of banks were problem.‖ The announcements that we found through found to be ―upward‖ window dressing. Banks were our research that were released to shareholders and also found to be ―downward‖ window dressing, but a market observers reflect the asymmetry in percentage of how many are engaged in that action information that exists. For example, consider the was not reported. One incentive for bank 11/22/2006 release from Ameriana Bancorp that management to overstate bank asset size (upward details its restructuring: window dressing) is to ―increase their consumption of size related perquisites.‖ From a shareholder‘s The Company took this step in an effort to improve perspective, there can be incentives to shrink the its interest rate risk position, using the proceeds from balance sheet at quarter‘s end (downward window the sale of the fixed-rate securities to repay certain dressing) in order to reduce regulatory taxes. short-term, variable-rate advances. In addition to de- leveraging the Company‘s balance sheet, this action In our research, we asked ourselves the question: Is is expected to improve net interest margin and portfolio restructuring a form of window dressing? increase net interest income in future periods, The definition of window dressing includes the words enabling the Company to recover the loss on sale ―deceptive practice of using accounting tricks to through increased earnings over the next two years. make a company‘s balance sheet and income statement appear better than they really are‖ (see A shareholder is left with more questions than Investorwords.com). The banks that were used in our answers by this announcement. The bank wants to study publicly announced that they were restructuring improve its interest rate risk position, yet it doesn‘t their portfolios, so in that regard they were not explain why it needs to be improved. It states that it deceptive. However, many other banks have taken will ―repay certain short-term variable-rate large securities losses without always announcing advances,‖ but what prepayment penalty will be their actions; so perhaps some can be viewed as incurred? Whenever a bank de-leverages its balance window dressing. sheet, capital, as a percentage of assets, rises. What are the bank‘s intentions for the extra capital…will it Allen and Saunders looked at the degree of pay a special dividend? Suffice it to say that there are reversibility, because window dressing by definition plenty of ―asymmetric‖ information problems that implies reversibility after a certain date. Indeed, there exist when management takes actions such as was a high degree of negative reversibility, in that portfolio restructuring. Thus, a statistical analysis to actions that were taken were undone after quarter‘s measure impact to shareholder returns is appropriate. end. While portfolio restructuring does not meet the classic definition of window dressing—i.e., deceptive Prior to the recent portfolio restructuring that we‘ve and reversed after a certain date—it does seem that seen in the banking industry, there was potential for one has to question whether it‘s done ―for show.‖ significant restructuring in the mid 1990s as a result From a present value standpoint, the losses taken on of SFAS 115. Papiernik (1997) examined whether the securities represent the difference between the yields adoption of the SFAS 115 led banks to restructure on the securities sold and market yields. As a bank their portfolios. Using a portfolio restructuring model moves forward with a new set of higher-yielding and employing logit regression analysis, she securities, the loss that was realized seems to be concluded that ―portfolio restructuring did not occur forgotten. Our research looks at the resulting or was minimal upon SFAS 115 adoption. SFAS 115 stockholder returns to see if the market rewards them was issued by the Financial Accounting Standards for management‘s actions. Board in May 1993. There has been no event in banking since then that would have potentially
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triggered widespread restructuring, other than the have been a trend from lower to higher yielding recent restructuring considered in our research. securities during recent restructuring, opposite from the general trend observed during the adoption of Initially, it was thought that banks adopting SFAS SFAS 115 during the mid 1990s. 115 would realize security gains and losses for several reasons, including capital maintenance, In the next section we discuss a bank‘s sources of income smoothing and tax related incentives. The revenue and the importance of interest income from restructuring that has occurred over the last few years the investment portfolio. Ostensibly, one reason for has, of course, been well after the adoption of SFAS restructuring is to help a bank‘s future interest 115. That is not to say, however, that SFAS 115 income. Barth et al. (1995) segregated the interest considerations are not influencing bank revenue component from other bank earnings and management‘s decisions. Banks engaged in recent, found a strong link to a bank‘s yearend share price. yearend restructuring are probably looking to boost Our research not only considered returns at yearend, stock performance. Because stock valuations are tied but also monthly returns following the restructuring. to earnings performance, we can infer that the restructuring falls under the heading of income UNDERSTANDING A COMMUNITY BANK’S management, if not income smoothing. SOURCE OF REVENUES
Papiernik et al. (2005) report that early adopters [of As a frame-of-reference, the revenue stream for a SFAS 115] balanced investments between AFS and typical business selling one or more products is a HTM to reduce interest rate risk and to increase summation of the revenue generated for all products financial flexibility. Moreover, it was those banks sold. Each product‘s revenue is simply the retail price that characteristically maintained portfolios that of the product times the quantity sold, which can be exposed the bank to higher interest-rate risk that annotated as: shifted the portfolio to a somewhat lower-risk n position. These same researchers cite Beatty as Total revenue PiQi having examined bank holding companies and i1 suggesting that those banks that maintained portfolios where i = ith product, n = total number of products with longer maturities were more likely to shift the sold by the firm. maturity structure of the portfolio upon SFAS 115 adoption. Although we did not look at the portfolio However, in the case of a bank, the revenue equation structure of the banks in our study, it would follow is distinctly different; it is comprised of two primary that the investments sold were longer-term securities terms: net interest income and noninterest income. with fixed interest rates. For banks with assets of $5 billion or less, the median split between net interest income and noninterest In earlier research, Papiernik et al. (2003) looked at income for 2006 was 84 percent/16 percent. the effects on bank capital, securities classification and portfolio spreads from SFAS 115. They report Although net interest income is the dominate revenue that economic effects of SFAS 115 adoption source, there has been much attention on community appeared to have resulted in significantly lower banks‘ ability to grow noninterest income over the portfolio spreads and portfolio yields for all banks. last 10 years, such as by offering securities and They explain that while this may reduce interest-rate insurance services. In 1999, Congress passed the risk, decreased portfolio spreads and yields represent Financial Services Modernization Act; this served to an economic cost to the bank. In our study, we catalyze the pursuit of fee income. This act, also believe that banks were searching for higher yields to known as the Gramm-Leach-Bliley Act, enabled mitigate the earnings impact from the flat yield curve. banks to merge with one another and to purchase Thus, if this assumption is correct, then there would
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financial service firms, with less likelihood that portfolio. This does not mean that a bank would particular businesses would have to be divested. manage its portfolio to be unprofitable; rather, there are competing roles for the portfolio. Walker et al. Madura (2006) compares the growth in banks‘ (2004) list the roles and objectives for a community noninterest income from 1984 to 2003 for small, bank‘s portfolio: medium, large and money center banks. There is an obvious degree of volatility in the trend lines, but in Generate interest income, all cases the general trend is upward sloping. For Assist in the management of liquidity, example, the trend for small banks (defined as banks Help manage interest rate and credit risk, with total assets less than $300 million) shows Satisfy pledging requirements for certain noninterest income (as a percentage of total assets) liabilities, and rising from approximately 0.7 percent in 1984 to over Assist with management of tax liabilities. 1.2 percent in 2003. Note that income from loan sales is one component of noninterest income that can be The priority of the above goals and objectives sensitive to the interest-rate environment and can depends on other aspects of the bank‘s operation, produce volatility. Nevertheless, one reason that such as the loan portfolio. For example, when a bank banks pursue noninterest income is that these sources has a large allocation to commercial loans, it might of income are usually less sensitive to changes in decide to limit credit risk in the investment portfolio interest rates compared to net interest income. to balance the risk in the loan portfolio. Even more Recently, banks have been challenged by a flat yield limiting, potentially, a need for liquidity can curtail curve that tends to squeeze their margins. This has both the credit premium and duration permitted for put added pressure on noninterest income growth. investments, which reduces yield and expected return. Ultimately, the portfolio objectives pursued Despite the growth in noninterest income in the correlate to expected return on the portfolio. banking industry, net interest income is still by far the dominate source of revenue. While some might Bank regulators require institutions to create an see bank mergers as a way to extend a bank‘s product investment policy that outlines the practices and and service offering, they also are occurring because procedures that will be followed by management. some banks are struggling with growing net interest Policy contains guidelines and constraints, such as income organically. Net interest income is sensitive the permissible asset classes and allocation targets. to changes in interest rates, growth or decline of bank As Strong (2006) states, investment policy is ―a long- assets, credit deterioration and other factors. While term concept.‖ In contrast, investment strategy ―deals the margin from a bank‘s loan portfolio is the largest with short-term activities that are consistent with component of net interest income, the margin on established policy and that will contribute positively investments is also significant. It is likely that toward obtaining the objective of the portfolio.‖ competitive forces will push banks to work hard at squeezing as many profits from the investment Given the competing goals and objectives listed portfolio as possible. It is this quest of incremental above, it should come as no surprise that some banks returns that has prompted portfolio restructurings. are more focused on producing income from their portfolios than others. It is those banks that are more FUNCTION OF THE likely to restructure their portfolios in order to INVESTMENT PORTFOLIO increase the return from their investments. This is not to say that banks with less emphasis on income won‘t After the loan portfolio, the investment portfolio is restructure. In fact, some banks might use the second largest earning asset class on the balance restructuring as a way to reduce interest rate risk if sheets of community banks. While banks manage greater interest rate volatility is expected or to their loan portfolios with profit maximization in increase liquidity when loan demand increases. Our mind, this is not always the case for the investment
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research attempts to examine restructuring when the the reinvestment, the bank would have a subsequent bank is trying to improve earnings quality and outflow of $19.75 million when it purchases new shareholder returns. However, it is not always evident securities for the portfolio, for a net upfront cash flow from public statements as to why the portfolio has of $0. If, however, the bank wanted to reestablish the been restructured and/or losses taken. full $20 million initial investment, then it would need to add another $250,000 to the cash outlay to offset USING THE NPV FRAMEWORK TO the loss on the sale. The resulting income stream ANALYZE THE RESTRUCTURING DECISION from the new investments would, of course, reflect the bank‘s decision to reinvest the $19.75 million or It might be helpful to analyze the restructuring of a to make up the difference and invest the full $20 portfolio like a traditional net present value (NPV) million. investment decision where a company makes a capital outlay today for a project that is expected to A bank that elects to reinvest only the $19.75 million boost cash flow in the future. In the case of a needs to compare the new cash flow resulting from portfolio restructuring decision, a bank might decide the new securities to the cash flow prior to the sale. to incur a loss on its investment portfolio to attempt The ―bought income,‖ as bankers sometimes term it, to improve its future cash flow by selling securities will be the new yield on the $19.75 million with below market yields and purchasing higher- investment, while the ―sold income‖ will be the old yielding investments. The bank has at least two yield on the sold securities in the amount of $20 choices. It can simply reinvest the proceeds from the million. Although the prior market value on the sale of securities, or it can decide to reinvest the investments had dropped to $19.75 million, the proceeds plus an amount that makes up for the total principal and coupon income before the sale was loss. This decision has cash flow implications. From based on the original $20 million investment. The a cash flow standpoint, the loss itself is not a negative upfront cash flows cancel out, as the $19.75 million cash flow. If a bank simply turns around and received from the sale is fully reinvested. In contrast, reinvests the proceeds from the sold securities into if the bank decides to reestablish the original $20 higher-yielding securities, the bank might attempt to million investment, there will be a $250,000 cash increase its future cash flow without a net cash outflow at the time of restructuring. That incremental outlay. This differs from the scenario where a investment will produce incremental yield income. company makes an investment, such as purchasing a Obviously, a total investment of $20 million can be piece of equipment or building a plant, to improve expected to generate a higher yield income than a cash flow. However, if the bank wants to increase the reinvestment of $19.75 million. level of investment to the initial amount to offset the loss, then the bank would incur a cash outlay that From a NPV standpoint, it appears that if the bank equals the net loss. simply reinvests the $19.75 million from the proceeds of the sold securities, there is no net For example, suppose a bank is going to restructure a outflow. If the resultant cash inflow from the new block of securities that originally cost $20 million. securities exceeds the foregone inflow from the sold Further, suppose it expects to sell the investments for, securities, then the decision made sense, right? What let‘s say, $19.75 million. This would generate a cannot be forgotten is that the ―underwater‖ block of positive cash flow of $19.75 million, plus a tax securities that were sold would have approached par benefit from the loss. The loss would be recorded on value as it trended toward maturity. Thus, there is a the income statement. For accounting reasons, banks smaller maturity cash flow that will occur after a are not supposed to sell securities with held-to- $19.75 million reinvestment than if the original $20 maturity designation; thus, our example assumes that million had been allowed to reach full maturity. A the securities are categorized in the available-for-sale rigorous cash flow analysis would need to account category and can be sold. Ignoring the tax benefit for for the entire impact that restructuring would have on
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the cash flows. However, that would be difficult to Assets and liabilities are priced off the Treasury yield assess, as securities would be maturing at different curve and the LIBOR swap curve. Banks tend to use times and coupon payments would differ between shorter duration funding and longer duration assets in securities. Nevertheless, a thorough NPV analysis— order to maximize their margins and spreads at any something that community banks rarely do—would point in time. Therefore, the slope of the yield curve need to account for all changes to interest and reflects banks‘ incremental margins and spreads at principal cash flow payments in order to justify any point in time. Fabozzi (2007) reports that some restructuring from a NPV standpoint. market participants use the difference between the 2- year and 30-year Treasury yields to measure slope, PRESSURE ON PROFITS AND THE while others use the 3-month yield instead of the 2- INCENTIVE TO RESTRUCTURE year yield as the short rate. If there is a steep slope, then there is a lot of spread. If the yield curve is flat, Put simply, banking is a ―spread business.‖ Banks there is no spread. There can be quite a variation in borrow money through the retail market from the steepness of the yield curve, which means that depositors and the wholesale market from other there can be a lot of variation in banks‘ incremental financial institutions. The wholesale market is spreads over time. For example, Fabozzi reports that extremely competitive and charges more for funds the difference between the 2-year and 30-year than the retail market. Banks that are able to obtain Treasury was 348 basis points in September and most of their funding from the retail market have a October 1992. Eight years later, in 2000, the yield distinct cost advantage and tend to see higher buyout curve slope was minus 65 basis points. premiums if the bank is sold. There can be a wide range of rates paid within the block of deposit The impetus for restructuring a bank‘s investment funding, as demand deposits are least expensive, portfolio ties back to what happened to the yield while longer-term CDs offer rates that are similar to curve starting around April 2004 when the slope the rates found in the wholesale market. started to decline. Table 1 shows the slope in the yield curve at the end of 2003, 2004, 2005 and 2006. Banks primarily use these borrowed funds to By the end of 2006 the slope was less than one basis underwrite loans—typically, real estate, consumer point, down from a generous 325.4 basis points just and commercial loans. Again, like the wholesale three years earlier. funding market, the pricing on loans is usually very competitive. In addition to loans, a bank normally has Table 1 a significant investment portfolio that can represent U.S. Treasury Yield Curve Data as much as 50 percent or more of the bank‘s assets. Loans and investments generate the lion‘s share of 30- 2-Year Yield Basis Point the bank‘s interest income; the cash-equivalents and End Year Yield Curve Change nonearning assets on the balance sheet provide very of: Yield (%) Slope (bp) little to the bank‘s bottom line. (%) 2003 5.073 1.819 325.4 N/A Net interest income before provisioning for loan 2004 4.826 3.065 176.1 -149.3 2005 4.535 4.400 13.5 -162.6 losses is the largest component of the bank‘s revenue 2006 4.810 4.808 0.2 -13.3 as mentioned in an earlier section of this article. Net interest income is measured in units of dollars, yet there are two ratios that are commonly used to In order to generate a spread, a bank tries to position measure a bank‘s net interest income performance: its liabilities at the short end of the yield curve (1-5 net interest margin and net interest spread. These years) and its assets in the intermediate (5-10 years) ratios track the difference between the average yield and long end (greater than 10 years) of the yield on earning assets and cost of funds. All else equal, curve. This mismatch in maturities usually produces profits increase as a bank‘s spread and margin widen. a positive spread and is the reward for assuming
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interest-rate risk. The data in Table 1 show that the rate of interest that exceeds the yield on the securities reward for assuming interest-rate risk evaporated in sold. From a pure spread standpoint, this makes three years, after having been very generous. sense. For example, a bank can sell securities that yield 4 percent and eliminate borrowings that are When the yield curve is flat, a bank can still make a costing 5 percent. The incremental spread is minus 1 spread, but it is harder. First, banks are able to obtain percent in this example, a losing asset/liability ―core‖ deposits—DDAs, savings, MMDAs, and CDs combination. What is often ignored is the loss on the with small denominations. Banks have historically securities and the prepayment penalty levied on the paid rates that are lower than true money market borrowings. The press release below from First rates, although consumers are becoming wiser as they Mariner Bancorp is representative of the ―shop‖ for high rates, sometimes using the Internet in announcements made by some banks when they their search. This has forced banks to be more restructured: competitive with their rates. Nevertheless, there continues to be money sitting in DDA and savings Press Release accounts with very low interest rates, helping banks First Mariner Announces Balance Sheet make a spread. The second way to make a spread is Restructuring, Provides Additional Quarterly Updates to take credit risk on the asset side. The more credit risk, the greater the spread relative to the risk-free Company Release - 12/22/2006 16:30 rates depicted by the Treasury curve. Again, though, BALTIMORE, Dec. 22 /PRNewswire-FirstCall/ -- credit spreads have narrowed concurrently with yield First Mariner Bancorp (Nasdaq: FMAR), parent curve spreads, compounding the difficulty of turning company of First Mariner Bank and Finance a profit from net interest income. Maryland, announced today that it has completed a Many banks have struggled to grow earnings in line balance sheet restructuring through the sale of with budgets over the last couple of years. Recently, investment securities and the repayment of there was an April 12, 2007 press release through borrowings. The restructuring will significantly SNL Financial by Jonathan Flax where he reported enhance future financial performance by reducing the that ―AG Edwards expects small and mid-cap banks level of lower yielding securities and decreasing the to report year-over-year EPS growth of only 1.3 level of higher cost wholesale funding. percent, owing largely to margin pressure and METHOLOGY AND RESULTS decreasing loan and deposit volume.‖ These sorts of news stories are ubiquitous. These economic Sources of Data conditions have forced bank management to cut costs The data used for this research was obtained from and to do anything possible to eke out another basis SNL Financial. The SNL database was screened for point or two in their spreads. If the bank holds banks with assets less than $5 billion in order to investments in the available-for-sale account that are focus on community banks and thrifts. There is no producing a below market yield, the temptation has clear definition of a ―community bank.‖ Christine been to ―restructure‖ the portfolio by selling Walika, Director of American Bankers Association‘s securities that are ―underwater‖ and replacing them Community Bank Council, is quoted as saying, ―We with higher-yielding securities. From a forward don‘t even have a definition‖ (Giegerich, 2005). The looking perspective, this will enhance a bank‘s key fields of data obtained were bank name and spread. location, gain/loss, and the size of the securities When banks elect to restructure, an asset swap is not portfolio. In addition, we decided to create a ratio that always the course of action taken. Sometimes a bank shows the relative size of the loss, found by dividing decides to ―deleverage‖ the balance sheet. The the gain/loss on sales of securities by total investment justification is to use the proceeds from the sale of securities. securities to prepay the funding that is costing them a
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We decided that it was more relevant to rank each We obtained monthly stock prices for the bank by the relative size of the loss rather than the restructuring sample banks for the period from absolute size. This changes the ranking. For example, January 2000 through June 2007 from Yahoo! in the 4Q06, the bank with the largest loss from the Finance and calculated the monthly total returns sales of securities was Oriental Financial Group, with (dividends reinvested) for each bank. We then a loss of $19.8 million. As a percentage of calculated the average monthly returns before the investments, this loss was 0.66 percent. The second restructuring and the average monthly returns after largest loss was realized by Yardville National the restructuring. These data can be found in Table A Bancorp at $6.5 million. As a percentage of in the Appendix. investments, this loss was 1.31 percent, nearly double the percentage loss recorded by Oriental Financial Since our stock price data comes from the Internet Group. source Yahoo! Finance, we were heartened by recent research, Clayton, Jahera, and Schmidt (2006), SNL Financial also has a repository of press releases showing that such on-line sources are as reliable as for financial institutions listed on an exchange or data from the traditional source the Center for pink sheet. However, accurate information about Research on Security Prices (CRSP). Pink Sheet stocks can be difficult to obtain because many do not file financial reports with the SEC. We To determine if the mean change in the monthly searched for and reviewed press releases for banks stock returns was statistically negative we conducted that took sizable losses to see if we could uncover an a dependent sample test of mean differences as explicit restructuring announcement. Often, firms described below. will alert the market to actions that will significantly Hypotheses: impact earnings. Indeed, in some instances where large losses were taken, a press release was found. In H0 : D 0 Ha : D 0 other cases, there was no mention of the loss. Test Statistic: The methodology was to identify banks that restructured their portfolios by (1) finding a x xD D iD significant loss taken in the fourth quarter of the year t x s / n D n and (2) confirming the restructuring by a press D D D release. Then, we analyzed the bank‘s stock performance by comparing its prior and post (x x )2 s iD D performance relative to the announcement. We D n 1 considered the stock performance from the end of the D quarter in which the restructuring occurred. Ideally, where: we felt that a two-year look-back versus a two-year look-forward comparison should be used. However, D is the hypothesized population mean most of the restructuring has occurred within the last difference in returns, for this study this is two years in 4Q05 and 4Q06, so our look-forward zero, data is limited.
xiD is the difference in returns for the ith The Restructuring Sample bank, We searched through the SNL database and found 21 banks which had announced investment portfolio xD is the mean of the sample differences, restructurings in the last three years. The banks, their ticker symbols, and restructuring quarter can be found in Table A in the Appendix.
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monthly total returns, mean returns before and after sD is the standard deviation of the sample ―restructuring,‖ and hypothesis tests of the mean differences, and differences. The somewhat surprising results are presented above in Table 2: the control sample banks n is the sample size. D had larger stock return losses than the restructuring banks. The results of the hypothesis test are shown in the restructuring sample column of Table 2 below. The For thoroughness, a second control sample was restructuring sample banks suffered a mean loss in selected using a slightly different random-selection stock returns of 1.80 percent or 180 basis points per technique and the above process was repeated a third month. time. Those results, again contained in Table 2 above, are consistent with the first control sample. Table 2 Hypothesis Test Results Testing the Samples for Significance
Control Control Restructuring Having found that the restructuring sample Sample Sample Sample outperformed the two control samples by 75 basis One Two points per month and 81 basis points per month, Sample -1.80% -2.55% -2.61% Mean respectively, we tested to determine if the differences Standard 0.48% 0.77% 0.50% were statistically significant. Error t-Statistic -3.7881 -3.3101 -5.2630 Hypotheses: p-Value 0.0006 0.0017 0.0000
H0 : 1 2 0 Ha : 1 2 0
However, the last three years have not be kind in Test Statistic: general to the holders of bank stocks. We obtained two indices of bank stock performance, a NASDAQ (x x ) ( ) bank index and the America‘s Community Bankers‘ t 1 2 1 2 s2 s2 index covering the January 2000 to June 2007 time 1 2 frame from the NASDAQ.com website, and n1 n2 calculated average monthly total returns for the same time intervals observed in our restructuring sample. where: These data are also shown in Table A. It can be observed that both indices are down for the relevant 1 2 is the hypothesized difference in periods. populations‘ mean returns, and xi , si , and ni are The Control Samples the sample mean returns, the standard deviations of the sample mean returns, and the sample sizes for the For comparison to the restructuring sample, we restructuring and control samples, respectively. randomly selected a control sample. This was done using the same SNL database of banks in which the The results of these hypothesis tests are shown in restructuring sample banks were found and using a Table 3 below. table of random numbers to select banks based upon their key identifier numbers in the database. The banks were selected from reporting years in the same proportion as the announcement years of the restructuring banks. We then followed the same process as before: calculate monthly stock prices,
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Table 3 We used Excel‘s two factor Anova function to Hypothesis Test Results perform the analysis and the ANOVA results are presented in Table 4 below. As can be seen in the Restructuring Restructuring table, neither the size nor the restructuring effect is Sample versus Sample versus statistically significant. Control Sample Control Sample One Two Table 4 Difference 0.75% 0.81% of Means Analysis of Variance Standard 0.90% 0.69% Error Restructured versus Control One Sample Banks Source of p- t-Statistic 0.8290 1.1780 SS df MS F p-Value 0.4169 0.2526 Variation Value Difference in Total 0.0182 20 0.0009 1.1218 0.3998 The differences in monthly returns are not Assets statistically significant and it cannot be claimed that Difference the benefits of the restructurings were not merely due in Pre- and Post- 0.0006 1 0.0006 0.7236 0.4050 to chance. Returns A Possible Size Effect Error 0.0162 20 0.0008 Total 0.0350 41 There are suggestions in the practitioner literature that investment portfolio returns might be directly related to bank size. For example, using the loan loss Restructured versus Control Two Sample Banks Source of p- provision as the proxy, Papiernik (1997) drew the SS df MS F Variation Value conclusion that ―earnings management was a concern Difference in 0.0080 20 0.0004 0.9834 0.5147 more so for the small size banks.‖ If this effect is Total Assets adequately large in our samples, a two-way analysis Difference in of variance might detect the size effect and show that Pre- and Post- 0.0000 1 0.0000 0.0000 0.9982 Returns the return differences are statistically significant Error 0.0081 20 0.0004 when corrected for size. Total 0.0161 41
For our two-way ANOVA the block variable is each bank‘s total assets, and the treatment variable is CONCLUSIONS AND IDEAS whether or not the portfolio was restructured. Total FOR FUTURE RESEARCH assets for each bank were obtained from the SNL database and the differences in returns were sorted by This research originated with one author‘s (Walker) increasing total assets for each sample. Thus, banks experience in the bank advisory industry and the of similar size are paired in the two-way ANOVA. observation that bankers were being advised to This technique tests two pairs of hypotheses restructure investment portfolios that were returning simultaneously: below-market yields. Superficially it would be difficult to justify this practice on the basis of a rapid
H 0 : the block means (size) are equal improvement in the bank‘s stock. One might be easily convinced that taking the accompanying losses
H a : the block means (size) are unequal would further depress the bank‘s stock.
H 0 : the treatment means (restructuring) are equal However, our results do not indicate that such a
H a : the treatment means (restructuring) are unequal restructuring lowers stockholder returns relative to bank industry returns as a whole, and our research
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hints that shareholders may in fact benefit from such As this paper is being written, the U.S. Treasury yield restructurings. curve is assuming the more standard positive slope. We plan to revisit these issues in a year or two with We looked at 21 instances where community banks the expectation that ―riding the yield curve‖ under restructured their investment portfolios during the those circumstances can indeed be shown to be fourth quarter of 2004, 2005 or 2006. We identified beneficial. those banks by screening for banks showing a portfolio loss in the fourth quarter and then finding a The data is limited post restructuring, particularly for public announcement from management that those banks that did their restructuring in the fourth restructuring in fact did occur. We found many banks quarter of 2006. Future research can attempt to that took securities losses, but few of these banks identify and analyze more banks that restructured and made a public announcement that they had to analyze results over a longer time frame. Based on restructured. our study, we cannot provide statistical evidence that restructuring is beneficial to shareholders in terms of The flattening of the yield curve that began during monthly stock returns. Although the economic 2004 has created a difficult interest-rate environment benefit appears compelling. for banks to operate. Traditionally, banks mismatch their assets and liabilities to earn a spread. With the REFERENCES flattening yield curve, this has made it tougher for banks to maintain their spreads. It appears that banks Allen, L. & Saunders, A. (1992). Bank window restructured their portfolios in a vain attempt to dressing: theory and evidence. Journal of Banking & increase profits and the value of their stock. Finance. 16(3), 585-623.
Our research looked at whether or not restructuring Banz, R. W. (1981).The relationship between return benefited those banks. We found that there was an and market value of common stocks. Journal of economic gain from restructuring, as monthly bank Financial Economics. 9, 3-18. returns were 75 basis points to 81 basis points higher Banz, R. W., & Breen, W. J. (1986). Sample- for those banks that restructured relative to two dependent results using accounting and market data: control samples that we tested. However, we could Some evidence. Journal of Finance. 41, 779-793. not show that the gain was statistically significant, so our results are inconclusive. Our sample size of 21 Barth, M. E., Landsman, W. R., & Wahlen, J. M. banks is small; thus, further research could look at a (1995). Fair value accounting: effects on banks‘ larger sample size. We selected banks that had a earnings volatility, regulatory capital, and value of separate restructuring announcement. It is contractual cash flows. Journal of Banking & conceivable that banks discuss their restructuring in Finance. 19, 577-605. their annual reports, without making a formal announcement to the markets. Beaver, W. H., Datar, S., & Wolfson, M. A. (1992). The role of market value accounting in the regulation There is research that suggests that larger banks of insured depository institutions. In J. R. Barth & R. behave differently than smaller banks in regards to D. Brumbaugh, Jr. (Eds.), The reform of federal financial management decisions. In order to test for a deposit insurance: Disciplining the government and size effect, we conducted a two-way analysis of protecting taxpayers (pp. 259-276). New York: variance that used size as the block variable and Harper Business. whether or not a bank restructured as the treatment variable. Neither the size nor the restructuring effect Clayton, Ronnie, John S. Jahera, & Bill H. Schmidt. was found to be statistically significant. (2006). Estimating capital market parameters: CRSP versus Yahoo! data. Unpublished paper presented at Southern Finance Association, November 18, 2006.
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DeMasi, J. (2006). Margin improvement through Papiernik, J. C., Meier, H. M., & Rozen, E. S. (2003). portfolio restructuring. Community Banker, 15(11), SFAS No. 115: Effects on bank capital, securities 62-64. classification, and portfolio spread. Bank Accounting & Finance. 14-20. De Meo, J. C. (1995). Barnett‘s response: Portfolio pressure. Banking Management, 71(1), 14. Papiernik, J. C., Meier, H. M., & Rozen, E. S. (2005). SFAS No. 115: Effects of Fair-Value Accounting on Fabozzi, F. J. (2007). Fixed income analysis. Securities Portfolio Restructuring. Bank Accounting Hoboken, NJ: John Wiley & Sons, Inc.. & Finance. 19-26.
Frieder, L. A. & R. B. Hedges (1994). Market value: Pickering, C. J. & Kalishek, K. (1993). Community The ultimate performance measure. Banking bank investments: Buying and selling without Management, 70(5), 60-65. criticism. Independent Banker, 43(6), 8.
Giegerich, A. (2005). Community banks prospering Pickering, C. J. (2001). Cleaning house: Year-end despite hazy definition. Portland Business Journal, 2001 is a great time to restructure your bank‘s Retrieved June 2, 2007, from portfolio. Independent Banker, 51(10), 78-79. http://portland.bizjournals.com/portland/stories/2005/ 07/11/story8.html Strong, R. A. (2006). Portfolio Construction, Management, & Protection. Mason, OH: Thomson Madura, J. (2008). Financial Markets and South-Western. Institutions. Mason, OH: Thomson South-Western. Walker, J. S., Blake, J. G., Brew, J. P., Brode, A., Neuberger, J. A. (1992). Bank holding company Poorman, Jr., F. (2004). Investment portfolio basics stock risk and the composition of bank asset for community financial institutions. Chicago, IL: portfolios. Economic Review - Federal Reserve Bank Financial Managers Society. of San Francisco, (3), 53-62.
Papiernik, J. C. (1997). Effects of fair value recognition on bank managers’ securities investment decisions. (Doctoral dissertation, Cleveland State University, 1997).
John S. Walker is an associate professor of accounting and finance at Kutztown University of Pennsylvania. He holds masters degrees in Chemical Engineering from the University of Delaware and in Business Administration from Lehigh University, where he earned his Ph.D. in Business and Economics. He is a Chartered Financial Analyst and spent 12 years as director of research for a bank advisory firm. He is co-author of a monograph titled A Financial-Agency Analysis of Privatization: Managerial Incentives and Financial Contracting. His research interests include privatization, banking, and portfolio management.
Henry F. Check, Jr. is an instructor of accounting and finance at Kutztown University of Pennsylvania. He received masters degrees in Business Administration and Economics from Lehigh University. His other research interests are firms with dual-class common capitalizations, the effect of dividend initiations on systematic risk, and public pension plan performance.
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Table A Restructuring Sample and Comparison Indices
NASDAQ Bank ACB Index Stock Return Ticker Restructuring Index Return Return Bank Symbol Quarter
Before Before Before After After After 0.65% 0.92% 0.65% Ameriana Bancorp ASBI 4Q 2006 -2.95% -0.23% -0.77% 1.99% 0.92% 0.65% CoBiz Inc. COBZ 4Q 2006 -2.78% -0.23% -0.77% -1.74% 0.92% 0.65% First Ipswich Bancorp FIWC 4Q 2006 2.00% -0.23% -0.77% First Litchfield 0.92% 0.92% 0.65% FLFL 4Q 2006 Financial Corporation -1.62% -0.23% -0.77% First Mariner 1.71% 0.92% 0.65% FMAR 4Q 2006 Bancorp -4.75% -0.23% -0.77% Lakeland Bancorp, 1.31% 0.92% 0.65% LBAI 4Q 2006 Inc. -0.80% -0.23% -0.77% 1.27% 0.92% 0.65% Legacy Bancorp, Inc. LEGC 4Q 2006 -0.79% -0.23% -0.77% Oriental Financial 0.93% 0.92% 0.65% OFG 4Q 2006 Group Inc. -0.70% -0.23% -0.77% Rurban Financial 0.08% 0.92% 0.65% RBNF 4Q 2006 Corp. 2.76% -0.23% -0.77% Security Bank 1.70% 0.92% 0.65% SBKC 4Q 2006 Corporation -1.59% -0.23% -0.77% Yardville National 2.01% 0.92% 0.65% YANB 4Q 2006 Bancorp -0.78% -0.23% -0.77% 1.95% 1.01% 0.82% Banner Corporation BANR 4Q 2005 1.10% 0.18% 0.03% ESB Financial 1.36% 1.01% 0.82% ESBF 4Q 2005 Corporation 0.25% 0.18% 0.03% First Charter 1.31% 1.01% 0.82% FCTR 4Q 2005 Corporation -0.09% 0.18% 0.03% First Financial 0.41% 1.01% 0.82% FFBC 4Q 2005 Bancorp. -0.48% 0.18% 0.03% MainSource Financial 1.40% 1.01% 0.82% MSFG 4Q 2005 Group, Inc. 0.39% 0.18% 0.03% Northway Financial, 0.96% 1.01% 0.82% NWFI 4Q 2005 Inc. 0.42% 0.18% 0.03% Peoples Community 1.33% 1.01% 0.82% PCBI 4Q 2005 Bancorp, Inc. -1.01% 0.18% 0.03% 2.60% 1.25% 4.16%* Capitol Bancorp Ltd. CBC 4Q 2004 -0.17% 0.03% 0.01% Hilltop Community 0.87% 1.25% 4.16%* HTBC 4Q 2004 Bancorp, Inc. -0.61% 0.03% 0.01% Midwest Banc 1.92% 1.25% 4.16%* MBHI 4Q 2004 Holdings, Inc. -0.67% 0.03% 0.01%
* The America‘s Community Bankers‘ Index originates in December 2003 but is only publicly available beginning in August 2004. Thus, these returns are for four months from August 2004 through December 2004.
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Table B Control Sample One
Stock Return Ticker “Restructuring Bank Symbol Quarter” Before After
Bridge Bancorp, Inc. BDGE 4Q 2006 1.11% 0.44% Crazy Woman Creek CRZY 4Q 2006 1.37% 0.12% Bancorp Incorporated Dearborn Bancorp, Inc. DEAR 4Q 2006 -3.69% 2.06%
Ephrata National Bank EPNB 4Q 2006 0.61% 2.09%
First Financial Bancorp. FFBC 4Q 2006 0.39% -1.71% First National Lincoln FNLC 4Q 2006 1.80% -0.39% Corporation Main Street Trust, Inc. MSTI 4Q 2006 0.91% -1.89%
Preferred Bank PFBC 4Q 2006 2.47% -0.14%
Premier Valley Bank PVLY 4Q 2006 2.85% -0.24%
S.Y. Bancorp, Inc. SYBT 4Q 2006 1.51% -2.09%
Security Bank of California SBOC 4Q 2006 0.62% -3.17% Arrow Financial AROW 4Q 2005 1.53% -0.37% Corporation County Bank Corp CBNC 4Q 2005 0.62% -1.42%
Diablo Valley Bank DBVB 4Q 2005 2.95% -0.19%
HF Financial Corp. HFFC 4Q 2005 1.44% 0.38%
Highlands Bankshares, Inc. HBKA 4Q 2005 1.30% -0.01%
Sonoma Valley Bancorp SBNK 4Q 2005 1.26% 1.85%
Team Financial, Inc. TFIN 4Q 2005 1.03% 0.48%
Cascade Bancorp CACB 4Q 2004 3.14% 1.52%
Center Bancorp, Inc. CNBC 4Q 2004 2.39% 0.97%
Northeast Bancorp NBN 4Q 2004 16.06% -0.70%
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Table C Control Sample Two
Stock Return Ticker “Restructuring Bank Symbol Quarter” Before After
Bay National Corporation BAYN 4Q 2006 1.73% -2.42% Cadence Financial CADE 4Q 2006 0.67% -1.37% Corporation Capitol Bancorp Ltd. CBC 4Q 2006 2.11% -7.35% Central Pacific Financial CPF 4Q 2006 1.85% -1.63% Corp. First Busey Corporation BUSE 4Q 2006 0.77% -1.57%
First Franklin Corporation FFHS 4Q 2006 0.83% 0.93%
Home Financial Bancorp HWEN 4Q 2006 1.55% -1.63%
Independent Bank Corp. INDB 4Q 2006 1.91% -2.21%
Renasant Corporation RNST 4Q 2006 1.59% -3.01% SCBT Financial SCBT 4Q 2006 1.44% -1.25% Corporation Sterling Banks, Inc. STBK 4Q 2006 1.53% -4.22% American River AMRB 4Q 2005 1.93% 1.04% Bankshares Delhi Bank Corp. DWNX 4Q 2005 -1.14% -0.59% First Community FCBC 4Q 2005 1.59% 0.36% Bancshares, Inc. German American GABC 4Q 2005 0.51% 0.61% Bancorp, Inc. Glacier Bancorp, Inc. GBCI 4Q 2005 2.45% 0.70% Lexington B&L Financial LXMO 4Q 2005 1.34% 0.45% Corp. River Valley Bancorp RIVR 4Q 2005 2.10% 0.06% Alaska Pacific Bancshares, AKPB 4Q 2004 1.67% 0.65% Inc. CBT Financial Corporation CBTC 4Q 2004 1.59% -1.00% Texas Capital Bancshares, TCBI 4Q 2004 3.91% 0.47% Inc.
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THE INFLUENCE OF U.S. PRESIDENTIAL ELECTIONS ON EXCHANGE RATES Dean Frear, Wilkes University Jennifer Edmonds, Wilkes University
ABSTRACT
U.S. Presidential elections have been responsible for many changes in the economy. Previous work has studied the impact of these elections on the Gross Domestic Product, interest rates, unemployment rates, exchange rates in other countries, etc. This study investigates the relationship between U.S. Presidential elections and Exchange Rate movement. We examine the exchange rates between the U.S. Dollar and the Euro, British Pound and the Yen. We seek to find a pattern in growth of the exchange rates during the presidential cycle. Results show the presence of a difference in growth of these exchange rates during the presidential cycle.
INTRODUCTION Exchange rates are influenced by the law of supply and demand. Other theories include purchasing Research in foreign markets indicate that political power parity, the balance of payments, the monetary events such as presidential and parliamentary approach, and portfolio balance approach. elections "create panic among foreign investor" Purchasing power parity compares prices in countries (Chiu, Chen, and Tang, 2005). Small economies may of similar goods. Balance of payments focuses on the be affected more than the larger U.S. economy and balance of payments on the current account and long therefore the reaction could be negligible or not at all. term capital. The monetary approach uses the theory Efficient market theory tells us that most of the of supply and demand, supply being controlled by the changes are already in the prices and that not much country and demand being influenced by the interest deviation will take place on or around the actual time rate for borrowers. The portfolio balance approach a final change occurs. Current monetary policy has a expands the monetary approach to include bonds and large effect on exchange rate. Politicians working on foreign debt. Although these look at specific pieces re-election may try to influence exchange rates in ―no unified theory exists (Cross, 1998). election years by cutting taxes and increasing ―spending and wait to devalue exchange rates until Little literature exists on the topic. The literature after elections‖ (Ghezzi, Stein, and Streb, 2001). found deals mainly with foreign market exchange Sibley investigating Latin America elections rate fluctuations and trade flows (Dell'Ariccia, 1999), indicates that there can be a ―negative impact on political risk and foreign exchange rates (Cosset & de nominal currency values‖ when a new president is la Rianderie, 1985) and foreign political cycle elected (2001). influence (Ghezzi, Stein, and Streb, 2001; Sibley, 2001). This study helps to extend the research in the The stock market analysts continually try to judge the area of political cycles and their economic influence causes of market movement. A stock market analyst, as it pertains to the U.S. Taulli noticed a change in investor psychology just after the November 2004 presidential elections. This METHODOLOGY was a positive reaction that took place for a few days immediately following the election. This was noted Before we begin a discussion of the data, we will as a relief rally among investors (Wall Street‘s Bush briefly discuss the presidential cycle. This timeline is doctrine, 2004). Our questions concern the influence based on a four-year cycle beginning with year of the on the exchange rates prior to the election, in other inauguration, and ending with the presidential words leading up to the election and then for a few election in the fourth year. In year 1, the time periods after the election. inauguration typically occurs in week 3 and we will
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refer to this first year as the adjustment period, which RESULTS stretches into early year 2. Toward the end of year 2, some individuals will announce the intentions for At first glance, the trend in quarterly averages shows candidacy, but this typically happens in early- to mid- a pattern: the average percentage change or growth in year 3. By the middle of the third year in this the exchange rate appears to have increased in the presidential cycle, most of the presidential candidates quarter preceding the election quarter of election rd have been identified. Primary elections are held in years. In other words, the 3 quarter of election early- to mid- year 4 (with many of them occurring in years appears to see higher growth in the exchange February or March, depending on the state). rates in than in non-election years. Table 1 shows the Democratic and Republican conventions are also held growth in average quarterly exchange rates for the in year 4, in late August to early September. The final time period studied. Figures 5, 6 and 7 show the event in this cycle is the actual U.S. presidential quarterly averages in growth for the exchange rates election date, which occurs in year 4, week 46. For between the United States Dollar and the Euro, the illustration, Figure 1 depicts this presidential cycle on Pound and the Yen, respectively. a time line. Figures 2, 3 and 4 show the daily However, these observed differences in growth, movement of the USD → EUR, USD → GBP and quarter to quarter, are not significant. See Table 2 for USD → YEN exchange rates, respectively, over the hypothesis testing results. This means that all most recent presidential cycle, 2001-2004. quarters are essentially the same in terms of growth The data are exchange rate data from the European for all three exchange rates studied (in both election Union (EUR), England (GBP), and Japan (JPY) as years and non-election years; see tests 1-2 in Table compared to the United States of America (USD). 2). We also found that differences in growth by The data is from the years 1987-2006. For the Euro, quarter in election years are no different from non- the only years available are between 1999 and the election years for each quarter for the USD → EUR present. We begin our analysis by calculating and USD → JPY exchanges. For the USD → GBP quarterly (weekly) averages for each of the exchange exchange, the earlier mentioned trend (Qtr3EY > rates. We then calculate the percentage change in Qtr3nEY) is significant at the 0.05 level. This was these average quarterly (weekly) exchange rates. All verified with a one-tailed t-test, with significance at of the tests and comparisons conducted are based on the 0.01 level. See tests 7-10 in Table 2. Other tests these percentage changes. performed verify that election years are no different from one another (tests 3-4) and non-election years We investigate two types of hypotheses: 1) to verify are no different from one another (tests 5-6) except the consistency of the data: we test the null for the USD → EUR exchange. 2001 and 2003 report hypothesis that all quarters (and weeks) within different average quarterly growth in exchange rates. election years are no different by using a series of one-way analysis of variance tests. We also test the Detecting a pattern in week-to-week changes in null hypothesis that no election year is different that growth is more difficult. See Figures 8, 9 and 10 for any other election year (by quarters and weeks), and weekly average growth patterns for the Euro, the conversely that no non-election year is any different Pound and the Yen exchanges, respectively. In than any other non-election year. 2) To investigate general, exchange rate growth fluctuates throughout the impact of the presidential cycle: we test the null the year between ± 0.10% for each of the three hypothesis that a particular quarter (or week) in one exchange rates studied. There is a slightly higher year is no different than that particular quarter (or level of variability observed in election years. For week) in any other year (or combination of years), we the USD → EUR exchange, this variability is even perform a series of two-tailed t-tests. more pronounced, although there are only two election years available to study. As with the quarterly observations, tests were performed to verify
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that the weeks within election years (and non-election between the United States and the European Union, years) are no different from one another (tests 1-2 in England, and Japan. Table 3). We also verify that across the time period There appears to be an increase in the quarterly studied, there are no differences year to year in exchange rate just before election time. However, weekly growth of the exchange rate (tests 3-6 in these quarter-to-quarter differences in the exchange Table 3). The results show that there are no rates are insignificant, except for the USD → GBP differences for the comparisons mentioned above for exchange. Differences were reported for the USD → each exchange rate, except for the USD → EUR EUR exchange, however, there are only two election exchange. For this data series, there are only two years available to study, and this sample size is too election years available and this has a strong impact low for meaningful results. The USD → GBP on the results of the test. exchange rate seems to respond to the U.S. The next set of comparisons involves comparing presidential cycle more so than the USD → EUR or weeks in presidential cycle to other weeks the USD → JPY exchange rates. presidential cycle. Table 4 outlines the activities in REFERENCES the presidential cycle and their corresponding weeks. Chiu, C.L., Chen, C. D., and Tang, W.W. (2005). Table 5 in the Appendix shows the average weekly Political elections and foreign investor trading in growth for the weeks in which there is a larger South Korea's financial markets. Routledge. Applied difference in growth between years of interest for the Economics Letters. 12, 673-677. England. time period studied. Larger growth indicates a change in growth 0.15%. The only weeks Cosset, J.C. and B.D. de la Rianderie. (1985). considered are those identified in Table 4. This table "Political Risk and Foreign Exchange Rates: An also indicates the level of significance of the Efficient-Markets Approach," Journal of difference between election years and non-election International Business Studies, 16, 21-55. years. Dell'Ariccia, G. (1999). Exchange rate fluctuations The results show that the primary election period and trade flows: Evidence from the European Union. could have an impact on the USD → EUR and USD IMF Staff Papers. International Monetary Fund. 40, → GBP exchanges. However, various states hold 3, 315-334. these elections at different times, so the overall impact of the primary elections cannot be estimated. Cross, S. Y. (1998). All about the foreign exchange The Democratic and Republican National market in the United States. Federal Reserve Bank of Conventions and the Inauguration could also have an New York. Retrieved May 30, 2007 from URL impact on the USD → GBP exchange. The national http://www.ny.frb.org/education/addpub/usfxm/ conventions typically span 4-5 weeks, with actual dates changing every election year, so the overall Ghezzi, P., Stein, E. and Streb, J. (2001). Real impact cannot be estimated. exchange rate cycles around elections. Economics and Politics, Blackwell Publishing, vol. 17(3), 297- CONCLUSIONS 330. U.S. Presidential elections have been responsible for Sibley, M. (2001). The impact of presidential many changes in the economy. Previous work has elections on currency values in Latin America. studied the impact of these elections on other Multinational Business Review. 9, 2, 14-20. variables, but rarely have exchange rates been Retrieved on March 12, 2007 from Ebsco Host at studied. In this study, we examined the significance URL of the impact of time of the year and other activities http:web.ebscohost.com/ehost/delivery?vid=9&hid=1 in the presidential cycle on the exchange rates 20&sid=03b97354-d235-4880-914c-b618bc
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Wall street's Bush doctrine. (2004). Editors. Business http://web.ebscohost.com/ehost/deleivery?vid=15&hi Week Online. Interview- Tom Taulli. Retrieved d=12&sid=03b97354-d235-4880-914c-b618bc March 12, 2007 from Ebsco Host at URL: Dean Frear is an assistant professor of organizational behavior in the Sidhu School of Business at Wilkes University. Jennifer Edmonds is an assistant professor of organizational behavior in the Sidhu School of Business at Wilkes University.
Table 1. Average Quarterly Percentage Changes in Exchange Rates USD →EUR USD →GBP USD →JPY (1999-2006) (1987-2006) (1987-2006) nEY EY nEY EY nEY EY average average average average average average Qtr1 0.03% 0.04% 0.01% 0.02% 0.01% 0.04% Qtr2 -0.01% 0.01% 0.00% 0.01% -0.02% -0.01% Qtr3 -0.02% 0.03% -0.02% 0.03% -0.01% 0.00% Qtr4 -0.01% -0.09% -0.02% -0.02% -0.01% 0.07% Where nEY denotes non-election years and EY denotes election years.
Table 2. Hypothesis Testing Results for Average Quarterly Percentage Changes USD →EUR USD →GBP USD →JPY (1999-2006) (1987-2006) (1987-2006) Test descriptor
1. Null: μQ1 = μQ2 = μQ3 = μQ4 EYs only 0.088* 0.815 0.802
2. Null: μQ1 = μQ2 = μQ3 = μQ4 nEYs only 0.384 0.109 0.736
3. Null: μ2000 = μ2004 EYs only 0.418+ NA NA
4. Null: μ1988 = … = μ2004 EYs only NA 0.442 0.669
5. Null: μ1999 = μ2006 nEYs only 0.052* NA NA
6. Null: μ1987 = … = μ2006 nEYs only NA 0.127 0.682
7. Null: μQ1 = μQ1 EY vs. nEY 0.827 0.970 0.606
8. Null: μQ2 = μQ2 EY vs. nEY 0.684 0.672 0.283
9. Null: μQ3 = μQ3 EY vs. nEY 0.174 0.009**++ 0.625
10. Null: μQ4 = μQ4 EY vs. nEY 0.146 0.982 0.786 The values shown are p-values calculated at the 0.10 significance level * indicates significance at the 0.10 significance level ** indicates significance at the 0.05 significance level + the test performed was actually a two-tailed t-test ++ a one-tailed t-test was also performed, p-value = 0.005 Where nEY denotes non-election years and EY denotes election years.
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Table 3. Hypothesis Testing Results for Average Weekly Percentage Changes
USD →EUR USD →GBP USD →JPY (1999-2006) (1987-2006) (1987-2006) Test descriptor
1. Null: μw1 = … = μw53 EYs only 0.006** 0.300 0.496
2. Null: μw1 = … = μw53 nEYs only 0.666 0.253 0.211
3. Null: μ2000 = μ2004 EYs only 0.006** NA NA
4. Null: μ1988 = … = μ2004 EYs only NA 0.775 0.771
5. Null: μ1999 = μ2006 nEYs only 0.428 NA NA
6. Null: μ1987 = … = μ2006 nEYs only NA 0.648 0.945 The values shown are p-values calculated at the 0.10 significance level * indicates significance at the 0.10 significance level ** indicates significance at the 0.05 significance level Where nEY denotes non-election years and EY denotes election years.
Table 4. Activities in the Presidential Cycle I. Comparing election years to non-election years Primary Elections (weeks 5-25)* National Conventions (weeks 34-38) Election Day (week 46)
II. Comparing Year i to Year j in the presidential cycle Inauguration (week 3)
* Primary election dates vary state-to-state, only larger difference
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Table 5. Average Weekly Percentage Changes in Exchange Rates for Weeks Coinciding with Activities in the Presidential Cycle
USD →EUR USD →GBP USD →JPY
(1999-2006) (1987-2006) (1987-2006)
nEY EY diff nEY EY diff nEY EY diff week average average (nEY-EY) average average (nEY-EY) average average (nEY-EY)
5 0.05% 0.27% -0.22%
6 0.08% -0.15% 0.22%*
9 -0.01% 0.15% -0.16%*
13 0.06% -0.16% 0.15%
15 -0.09% 0.13% -0.21%
34 -0.01% 0.17% -0.17%**
35 0.00% 0.20% -0.20%
38 -0.04% 0.18% -0.22%*
nIY IY diff nIY IY diff nIY IY diff week average average (nIY-IY) average average (nIY-IY) average average (nIY-IY)
3
4 -0.07% 0.09% -0.16%*
Where nEY denotes non-election years and EY denotes election years.
Where nIY denotes non-inauguration years and IY denotes inauguration years.
* indicates significance at the 0.10 significance level
** indicates significance at the 0.05 significance level
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Figure 1. The Presidential Cycle
Year Year Year Year 1 2 3 4
conventions Adjustment period for ‗new‘ Intentions for candidacy Primary elections presidential candidate stated
Figure 2. USD → EUR exchange rate for the 2001-2004 Presidential Cycle
USD -> EUR
1.20
1.10
1.00
0.90
0.80
0.70
1/1/20014/1/20017/1/200110/1/20011/1/20024/1/20027/1/200210/1/20021/1/20034/1/20037/1/200310/1/20031/1/20044/1/20047/1/200410/1/2004
Figure 3. USD → GBP exchange rate for the 2001-2004 Presidential Cycle
USD -> GBP
0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40
1/1/014/1/017/1/0110/1/011/1/024/1/027/1/0210/1/021/1/034/1/037/1/0310/1/031/1/044/1/047/1/0410/1/04
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Figure 4. USD → JPY exchange rate for the 2001-2004 Presidential Cycle
USD -> JPY
140.00 130.00 120.00 110.00 100.00 90.00 80.00 70.00
1/1/20014/1/20017/1/200110/1/20011/1/20024/1/20027/1/200210/1/20021/1/20034/1/20037/1/200310/1/20031/1/20044/1/20047/1/200410/1/2004
Figure 5. (left) The quarterly percentage change in USD → EUR exchange rates for non-election years between 1999-2006. (right) The quarterly percentage change in USD → EUR exchange rates for election years between 1999-2006 only.
USD -> EUR - Quarterly Averages USD -> EUR - Quarterly Averages (Non-election Years, 1999-2006) (Election Years, 1999-2006)
0.05% 0.05%
0.00% 0.00% Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 -0.05% -0.05%
-0.10% -0.10%
Figure 6. (left) The quarterly percentage change in USD → GBP exchange rates for all non-election between 1987-2006. (right) The quarterly percentage change in USD → GBP exchange rates for election years between 1987-2006 only.
USD -> GBP - Quarterly Averages USD -> GBP - Quarterly Averages (Non-election Years, 1987-2006) (Election Years, 1987-2006)
0.03% 0.03% 0.02% 0.02% 0.01% 0.01% 0.00% 0.00% -0.01% Qtr1 Qtr2 Qtr3 Qtr4 -0.01% Qtr1 Qtr2 Qtr3 Qtr4 -0.02% -0.02% -0.03% -0.03%
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Figure 7. (left) The quarterly percentage change in USD → JPY exchange rates for non-election years between 1987-2006. (right) The quarterly percentage change in USD → JPY exchange rates for election years between 1987-2006 only.
USD -> JPY - Quarterly Averages USD -> JPY - Quarterly Averages (Non-election Years, 1987-2006) (Election Years, 1987-2006)
0.08% 0.08% 0.06% 0.06% 0.04% 0.04% 0.02% 0.02% 0.00% 0.00% -0.02% Qtr1 Qtr2 Qtr3 Qtr4 -0.02% Qtr1 Qtr2 Qtr3 Qtr4
Figure 8. (left) The weekly percentage change in USD → EUR exchange rates for non-election years between 1999-2006. (right) The weekly percentage change in USD → EUR exchange rates for election years between 1999-2006 only.
USD -> EUR - Weekly Averages USD -> EUR - Weekly Averages (Non-election Years, 1999-2006) (Election Years, 1999-2006)
0.40% 0.40% 0.30% 0.30% 0.20% 0.20% 0.10% 0.10% 0.00% 0.00% -0.10% -0.10% -0.20% -0.20% -0.30% -0.30% -0.40% -0.40%
Figure 9. (left) The weekly percentage change in USD → GBP exchange rates for non-election years between 1987-2006. (right) The weekly percentage change in USD → GBP exchange rates for election years between 1987-2006 only.
USD -> GBP - Weekly Averages USD -> GBP - Weekly Averages (Non-election Years, 1987-2006) (Election Years, 1987-2006)
0.40% 0.40% 0.30% 0.30% 0.20% 0.20% 0.10% 0.10% 0.00% 0.00%
-0.10% 1 6 -0.10% 11 16 21 26 31 36 41 46 51 1 6 11 16 21 26 31 36 41 46 51 -0.20% -0.20% -0.30% -0.30% -0.40% -0.40%
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Figure 10. (left) The weekly percentage change in USD → JPY exchange rates for non-election years between 1987-2006. (right) The weekly percentage change in USD → JPY exchange rates for election years between
USD -> JPY - Weekly Averages USD -> JPY - Weekly Averages (Non-election Years, 1987-2006) (Election Years, 1987-2006)
0.20% 0.20%
0.10% 0.10%
0.00% 0.00%
1 7 13 19 25 31 37 43 49 1 7 13 19 25 31 37 43 49 -0.10% -0.10%
-0.20% -0.20%
1987-2006 only.
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SOUTH CENTRAL PENNSYLVANIA – TRACKING THE REGIONAL ECONOMY Ken Slaysman, York College ______
ABSTRACT
The availability of good data on the health of regional economies is hampered by the length of time it takes to process and publish sub-national data. Local business and public decision-makers must often make decisions using information that lacks currency. One approach to providing more timely information for local decision-makers is the use of qualitative business activity surveys. This involves asking business participants in the local economy to assess the level of business activity in their region. This paper discusses the use of qualitative business surveys for public policy and business decision-making purposes and then presents the results from the last 6 quarters of a survey conducted in South-Central Pennsylvania.
Sub-national data is notoriously slow to be publicly An advantage of qualitative business surveys is that disseminated, making timely information about sub- they do not require participants to reveal any national economies difficult to obtain. For both information that would leave them at a competitive business and public decision-makers, the scarcity of disadvantage. Since the questions ask only about the timely local information makes informed decisions direction of change in key business indicators and not difficult to make. Qualitative business surveys are for specific numbers more businesses may be willing used extensively in Europe1 and to a lesser degree in to participate. Qualitative surveys also take less time the United States 2 in an attempt to provide local to fill out than more extensive quantitative surveys so decision-makers with better information on the that busy executives are more likely to respond. direction of local business activity. Processing time is also reduced. The downside is that qualitative surveys provide less robust information that quantitative ones.
1 The Centre for International Research on Economic It would be far more useful to know by how much Tendency (CIRET), serves as a focal point for the capital spending increased rather than that many, primarily, European organizations that conduct such tendency surveys. expenditures just increased. This seems to manifest 2 Examples of qualitative business surveys conducted itself in a typically large portion of respondents who in the United States include: Kern County, CA report ―no change‖ on many of the indicators. conducted by Abbas Grammy from CSUB, South-Central Pennsylvania Business Outlook Evansville, IN conducted by The University of 3 Southern Indiana College of Business, Dane County, Survey WS conducted by The University of Wisconsin at In March 2006, we began surveying businesses in Madison, entire United States conducted by The South-Central Pennsylvania in cooperation with the Central Penn Business Journal. Using the Central Business Roundtable and another conducted by the Penn Business Journal‘s business database of 5000 AICPA, Dallas conducted by the Dallas Federal Reserve Bank, Philadelphia region conducted by the
Philadelphia Federal Reserve Bank, South Jersey conducted by the Philadelphia Federal Reserve Bank 3 For the purposes of this paper, South-central and Vermont conducted by the Vermont Business Pennsylvania encompasses the six county region Roundtable. including Adams, Cumberland, Dauphin, Lancaster, Lebanon and York counties.
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email addresses, we send out our survey 4 at the PRELIMINARY RESULTS beginning of every quarter. While this does not yield us a scientifically selected sample, it does The broadest measure used in the survey is simply significantly streamline the data collection process. the general level of business activity. Respondents are asked to compare the current general level of Email responses make it far easier for business business activity in the region with the previous participants to respond and because all responses are quarter and with the next two quarters. Based on electronic there is no need for data entry. This their responses, we calculate a diffusion index, the greatly enhances the turn-around time. results of which are shown below.
The survey asks participants to indicate 4 basic General Economic Activity things: (1) the direction of change in the general 35.0 level of business activity in the US economy, the 30.0 state economy, the regional economy and in their 25.0 Six month forecast company during the quarter just completed as 20.0 compared to the previous quarter; (2) the direction of 15.0 Current change in the general level of business activity Index* Diffusion expected in the US economy, the state economy, the 10.0 regional economy and in their company in the 5.0
0.0 coming six months as compared to the quarter just 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 completed; (3) the direction of change in key * percentage of respondents indicating an increase minus the percentage indicating a decrease company-level business indicators5 during the quarter just completed compared to the previous quarter; and Both the current and future index have remained (4) the direction of change in the same company- above zero for the last six quarters although the last 2 level indicators in the coming six months as quarters have seen a significant fall. It will take some compared to the quarter just completed. time to gain experience with this survey to The primary measure we use to track changes in the understand whether the decline in the first quarter of business indicators reported on in the survey is a this year is significant or whether it has some sort of diffusion index. For each indicator used in the seasonality aspect to it. survey we calculate the percentage of respondents Through the first six quarters of conducting this who indicated an increase, the percentage who survey, expectations about the future level of indicate no change and the percentage who indicate a business activity for the region are always more decrease. Subtracting the percentage reporting a optimistic than the perceived level of current decrease from the percentage reporting an increase economic activity. These two measures certainly we produce a diffusion index for each indicator. This trend together and the gap between them is fairly index ranges between -100 and +100 with a midpoint stable. of 0. At the midpoint there are equal numbers of respondents who report increases and decreases. It may be that the trend, in terms of the gap between the current perceived reality and expectations about the future provides the key to understanding this 4 See appendix 1 for a copy of the survey instrument. significance. A widening of the gap may be the This survey follows the work of the Philadelphia signal of an impending downturn in economic Federal Reserve Bank and their Business Outlook activity. Survey. 5 These indicators include sales, inventories, Beyond the general level of economic activity, customer inquiries, employment, prices, resource costs and investment spending. respondents are asked to report on 12 company- specific business indicators. The first of these is the
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current level of sales, shipments for manufacturing Product Inventory firms, compared to the previous quarter and 35.0 compared to the next six months. The diffusion 30.0 index for this indicator is shown below. 25.0 Six month forecast 20.0
15.0 Sales
90.0 10.0 DiddusionIndex
80.0 5.0 Current
Six month forecast 70.0 0.0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2
60.0 -5.0
50.0 -10.0 Quarter 40.0
DiffusionIndex Current
30.0 The third company-specific indicator we track is 20.0
10.0 customer traffic or inquiries. This is a leading
0.0 indicator, perhaps predicting future swings in 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 Quarter business activity. The diffusion indices are shown below. Once again, the current and future indices have been positive since we started the survey but the trend has Customer Traffic or Inquiries been slightly downward. The current and future 70.0 indices trend together and the gap remains pretty 60.0 Six month forecast consistent 50.0
The second company-specific indicator we ask 40.0 Current 30.0 businesses to report on is the level of product DiffusionIndex inventories. The diffusion index for product 20.0 inventory is shown below. 10.0
0.0 The behavior of these indices show that current 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 Quarter inventory levels have been pretty stable with the diffusion index hovering between +5.0 and -5.0. The Reports on the current level of inquiries or traffic are future index has steadily declined reducing the gap steadily positive but falling while expectations about between the indices. When current inventory levels future levels of inquiries or traffic are steadily are stable but future inventory levels are expected to optimistic. increase, it either means production is expected to pick up or sales are expected to fall. The next two indicators we track are employment and weekly hours. Because of the close relationship With sales expected to be increasing, respondents between these two indicators, they are shown must, over the last 6 quarters, have been expecting together. The current employment diffusion index production to pick up. That has not seemed to and the future employment diffusion index seem to materialize so the gap between expected future move in opposite directions. inventory levels and current levels has shrunk.
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Employment and Hours rising. Respondents do not differentiate much 45.0 between current conditions and future conditions for Six month employment forecast 40.0 these indices. They tend to move very closely 35.0 together. 30.0
Six month hours forecast 25.0 We will also treat the next two indicators together – Current Hours 20.0 DiffusionIndex the cost of wages and the cost of benefits. 15.0 Current Employment 10.0 Wages and Benefits
5.0 70.0
six month wage cost six month benefit current benefit cost 0.0 cost forecast 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 forecast 60.0 Quarter 50.0
current wage cost The results are interesting. Current employment and 40.0 current hours seem to move in opposite directions 30.0 suggesting that hiring new employees reduces DiffusionIndex 20.0 average hours worked. Not so as respondents look to the future, where employment and average hours 10.0
0.0 move together. 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 Quarter Both the current and the future indices suggest a Both wages and benefits are on an upward trajectory. widespread belief that employment is growing and The sense of rising wages and benefit costs is will continue to grow in the future. The current spreading more widely through the sample. Benefit employment and future employment indices as well cost seem to be more widely reported as rising than as the current hours and future hours indices seem to wages do. move in the opposite direction. The last indicators we track are a series of capital The next two indicators are prices received and prices spending indicators, one for spending for the paid for raw materials. Once again, there is value in acquisition of new space, one for the renovation of looking at these two indicators together. existing space and one for spending on new equipment. Prices Received and Prices Paid for Raw Materials
80.0 Current Capital Expenditures
70.0 35.0
60.0 30.0 current prices paid
50.0 current equipment 25.0 six month prices paid forecast 40.0
20.0 DiffusionIndex 30.0 six month prices received forecast
15.0 DiffusionIndex 20.0 current existing space current prices received 10.0 10.0
current new space 0.0 5.0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 Quarter 0.0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 Quarter Both indicators are above zero suggesting a widespread belief that both prices received and prices The trend in the diffusion indices for all three paid are currently rising and will continue to rise in categories of current capital spending is down, the future. The notion that raw materials prices are significantly for new space acquisition but less so for rising is more strongly felt in the respondent existing space renovation and equipment spending. population than the notion that prices received are All three indices are fairly volatile but the swings up
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and down are consistent across all three indices. As we gain experience with this survey and learn to Capital spending probably functions as a leading distinguish long-term trends from short-term indicator of economic activity. anomalies regional business and public policy makers will have a tool that they can use to improve the Six Month Capital Spending Forecast quality of their decisions. 45.0 40.0 six month equipment forecast REFERENCES 35.0
30.0
25.0 European Commission Directorate-General for six month renovation 20.0 forecast Economic and Financial Affairs (2007). The Joint
15.0
DiffusionIndex Harmonised EU Programme Of Business and 10.0 six month acquisition forecast 5.0 Consumer Surveys: User Guide, July 4, 2007.
0.0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 -5.0 Schiller, Timothy and Trebing, Michael (2003). -10.0 Taking the Measure of Manufacturing. Business Quarter Review, Q4 2003, 24-37. The six month capital spending forecast indices also show a sharply downward trend. The set of capital spending indicators are the only ones where Trebing, Michael (1998). What‘s Happening in expectations for the future are less optimistic than the Manufacturing: ―Survey Says….‖ Business Review, perceptions of current activity. As a leading September/October 1998, 15-29. indicator, this may be an indication of trouble on the horizon.
Dr. Ken Slaysman is the Director of the Federal Institute for Regional Affairs and an associate professor of economics at York College.
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WHY IS SELLING NOT TAUGHT IN THE PENNSYLVANIA UNIVERSITY ENVIRONMENT Edward J. Fox, South University
ABSTRACT A Wall Street Journal article dated April 11, 2006 brought this topic to the author‘s attention and upon a detailed study of the course offerings of all major Universities and Colleges in Pennsylvania; the conclusion was that the Pennsylvania Universities and Colleges are truly not meeting the needs of some of their customers (their business students).
OPENING REMARKS METHODOLOGY On April 11, 2006, a lead article in the Wall Street After completing a comprehensive study of 148 Journal, Careers section was entitled ―Off Course: If Pennsylvania Colleges and Universities courses of sales is so important why is it not taught?‖ Using the study, and using extensive personal experiences, the points in the article as a springboard, this author has following findings were established. summarized his research on Pennsylvania Colleges and Universities course offerings and the findings on The first major reason is that it appears that this important subject. Academia has dropped the ball. Many Universities don‘t even offer Marketing as a major, let alone a There are more than 31,000,000 sales people in the major in Sales, at either the undergraduate or MBA United States. Of that number 15,000,000 people are level. Yet, it appears that more than 50% of College employed as consumer sales people and the balance and University graduates from all disciplines accept a of 16,000,000 employed as business-to-business sales job as their first full time career job (NSMC, (B2B) salespeople (Zoltners, Sinha & Zoltners, 2001, 2006). p.366; Wolfe, 2000). Marketing is a complex integrated process that is REASONS FOR THIS STUDY changing rapidly (Bearden, Ingram & LaForge, 2006). Direct selling is but one aspect of marketing. The purpose of this study was to ascertain the total Developing a sales professional takes a long time and number of sales jobs and the related turnover and to cannot be covered in one course in Marketing or even learn what Pennsylvania Universities can do to bridge in one course in Professional Selling (Tracy, 1995). the gap by teaching the many skills that are needed in the sales situation. A consumer sale is rather straight forward, as it focuses on the consumer needs wants. By the very SUMMARY OF THE LITERATURE and OBSERVATIONS nature of the position, it is usually conducted in a retail store environment. Direct sales to consumers An important fact to note is that 23.4% of all sales and businesses are usually conduced over the people turnover yearly (Zoltners, Sinha & Zoltners, telephone or on a web site. 2001, p.366). This is a very significant statistic when salespeople are contrasted with other business Business-to- Business selling is much more complex, professional who turnover on average about 12% a as it deals with the customer‘s many buying elements year. Why does this happen? There are many reasons, in the customer‘s places of business. Of the two and this paper does not deal with the major reasons different types of sales, B2B sales positions are but does examine the reasons that why students are usually more of a career position (Webster and Wind not prepared for a selling career . (1996).
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For many years, Industry filled the void left by the Universities, but in both cases, after a year, although University teaching systems, and trained their own supported by interested students, they were both sales people at their companies. However the discontinued by a myopic administration in each of downsizing, rightsizing and re-engineering efforts by the Universities involved (PSE, 2006). companies to control their costs during the 80‘s and 90‘s have ended with the dismantling of most Most Universities that have business departments, company training organizations. today focus on granting Accounting degrees, as well they should. As the service environment has As Industry has recovered from one of their biggest gradually replaced the industrial environment there blunders; the elimination of Human Resource are many auditing positions offered to graduates with functions; that have recently been rebuilt at most accounting degrees. companies as the focus on Human Capital has emerged. Human resource Departments are usually Those students wanting to focus on learning finance charged with creating appropriate training programs also have a large source of employment upon that usually don‘t fill the needs of the sales graduating. organization. Entrepreneurship is a growing field, as well. The So, who is left to build the skills for the B2B skills learned can be applied to business situations as salespeople? There is a cottage industry of sales well as entrepreneurship opportunities opening many consultants who are generally very poor in their avenues for finding employment. instruction techniques. Industry does not fund the With digital computing growing as rapidly as it is, process and Universities don‘t fill the bill. What a there are many opportunities for graduates with a great opportunity for a perceptive College or computer focused degree. University. Many students major in management, but the bad In several Midwest locations, at one location in New news for the undergraduates is that, there are very Jersey, and at sporadically located sites in the few management training opportunities available in Southeast, Colleges and Universities have set up industry to graduates with Management degrees. programs to train professional salespeople who From the MBA program viewpoint company HR graduate and usually receive employment by large organizations have taken on many of the subjects organizations such as 3M who work directly with addressed in the MBA courses. The same downsizing Colleges and Universities that have Sales programs referred to earlier in this paper, during the 80‘s and and a PSE Chapter on campus. 90‘s, eliminated most management training startup To complement the needed University sales focus; opportunities for undergraduates. over 50 years ago, the Sales and Marketing Executive Marketing majors are in the same situation. There are International (SMEI) was created and also created a many marketing oriented jobs available, but they all student sales organization named PI Sigma Epsilon are generally seeking applicants that have experience. (PSE). The work of this specific organization allows So there are very few startup marketing positions students to apply classroom learned subjects in available, except in sales; a subject about which most selling in many realistic sales environments during students have not really learned a lot about in filling their college years (PSE 2006). the requirements for their major course of study. In these progressive Colleges and Universities that CONCLUSIONS offer sales programs, you will usually find a very active student PSE chapter. There are no active Is the lack of Sales courses available at Universities Chapters of PSE in the state of Pennsylvania. Two one reasons for the high turnover in Sales positions? PSE chapters were started in two Pennsylvania Outside of Penn State who offers a major in Real
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Estate, no other Pennsylvania University offers any the reason for this statement by also pointing out that complete sales programs. Since Industry has ―selling is a dirty word to many people, because it eliminated the cost involved in training sales people, has been so long linked to images of manipulation many graduating students are a caught in a ―Catch and deceit‖ (p.10). Yet, the top 5% of salespeople 22‖. usually are among the highest earners in the country (p.13). Public seminars don‘t draw very well today. However, if a man named Brian Tracy is in town, his REFERENCES seminars sell out all of the time. The reason is that generations of successful sales people have Alsop, R., (2006). Off Course / If Sales Are so subscribed to his beliefs in what it takes to succeed as Important, Why Isn‘t IT taught?. New York, NY: a professional Salesperson, particularly as a B2B The Wall Street Journal, Career Journal, April 11, p. Salesperson. (NASA, 2004). B 8.
In his very popular Professional Selling Program, he Bearden, W.O., Ingram, T.N. & LaForge, R.W. th makes the point that a professional Salesperson needs (2006). Marketing principles and Perspectives, 5 to learn daily. Tracy encourages salespeople to use edition. NY, NY McGraw Hill. what he refers to as the University on Wheels. His Miller, R.B., Heinman, S.E. and Tuleja, T. (1985) point is, a salesperson should not to listen to their car Strategic Selling, New York: Warner Books. radio between sales calls, but to reinforce their skills by listening to Tapes and CD‘s dealing with sales National Speaker; Association(NSA), Opening subjects (Tracy, 1995). speech, Philadelphia PA July 1, 2003.
Aren‘t Universities charged with responsibility to National Sales Management Conference (NSMC teach students applicable business related skills? Are 2006). Opening speech. Minneapolis, MN. March 25, Universities in Pennsylvania going to leave the 2006, Pi Sigma Epsilon, 2006, PSE Web Site instructing to sales consultants to try to teach selling skills to business school graduates? Or, will they Tracy, B. (1995)The Psychology of Selling. Niles, Il. ever step up to fill the very large void in both Nightingale Conant. undergraduate and MBA programs? Webster, F.E. Jr. & Wind, Y. (1996). A general The first step a Pennsylvania Colleges or Universities model for understanding organizational buying must get over is to change their perception about behavior. Marketing Management, 4,4, 52-57. professional salespeople. As noted by Miller, Wolfe, I. (Speaker) (2000), Job related statistics and Heinman & Tuleja (1985) the authors of one of the trends. At Target Training International Winter best books about selling, the sales profession is one Seminar, Phoenix, AZ., January 8. of the oldest professions and ―selling is the largest profession in North America, perhaps the world. Yet Zoltners, A.A., Sinha, P.K. & Zoltners, G. A. (2001). it has one of the worst reputations of any profession – The successful selling organization, in Kellogg on second only to politics‖ (p.9). The authors amplify Marketing, ed. Dawn Iacobucci, New York: John F. Wiley and Sons
Edward J. Fox is a professor at South University.
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MODELS DESCRIBING LOYALTY AND THE APPARENT MISMATCH BETWEEN THE MARKETER AND THE CONSUMER Jefrey R Woodall, York College of Pennsylvania
ABSTRACT In literature today there are many articles that outline the loyalty or reward programs offered by marketers in a variety of industries and channels. There are also many articles that study consumer behavior and the influencers of loyalty. However, there are few that combine the two areas of research to determine if the rewards provided match the interests and needs of the consumers they are meant to incent. This paper provides one view in that arena based on the literature, as well as a recent survey of grocery shoppers in South Central Pennsylvania.
INTRODUCTION recommendation of future research opportunities will be provided. Reward programs have been used by marketers for years. Some authors point to the American Airlines LITERATURE REVIEW frequent flyer program started in the 1980s as the first program, and others consider the trading stamp In an article by Kim, Shi, and Srinivasan (2001), they programs from the 1960s as the pre-cursor today‘s developed a game theory model to help marketers programs (Kim, Shi, & Srinivasan, 2004). The stated determine what kind of reward program would be purpose of those programs has been to attract and best for their business. The model was based on maintain customers to the marketers‘ products, identifying the switching costs within the industry whether they are goods or services. The programs and to therefore create a reward program that are designed to provide the marketers with a increases the likelihood of getting a consumer to competitive advantage, and improve satisfaction with switch. However, the cost of those programs has to the marketers‘ products (Fowler, 2003; Wansink, be reflected in the cost of goods, thereby influencing 2003). the overall price to be paid for the products. Through the model, once the type of user, size of the market, The type of reward varies by industry. Several and type of product are known the model can design authors (O‘Brien & Jones, 1995; Matilla, 2001), state the appropriate reward. While the model was tested, that marketers offer a variety of rewards, including the authors admit to a need for further testing to price reduction, such as those offered at retailers; prove the validity of the model. reduced costs over time, such as those offered by cell phone companies; price reduction on future In a different article the same authors (Kim, Shi, & purchases, such as those offered by retailers and Srinivasan, 2004) developed another game theory on restaurants; and dollars or points toward future reward programs, in which they suggest that purchases, such as those offered by hotels, airlines, programs have developed that utilize over-capacity as and credit cards. the reward. They say this is common among hotels and airlines. For example, when the marketer In this paper a review of several of the models that realizes they have excess capacity, they can offer the describe reward programs will be presented. excess seats or rooms at a reduced price to their Following that will be a comparison to the frequent customers. In the article, the authors present consumer‘s view of importance factors, supported by a model firms could use to determine when and at a recent survey of shoppers in South Central what discount to offer the reduced product (seat, Pennsylvania grocery stores. Finally, a room, etc.).
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In addition to the models developed to examine Department at a South Central Pennsylvania College. reward programs used to build loyalty, other factors A link to the questionnaire was sent to 51 individuals, also are presented in the literature as loyalty drivers; with 31 completing the survey. Of the 31, 2 were not chief among them are pricing strategies. Several complete, leaving a sample of 29 questionnaires, or articles talk about the need to manage retail revenue 57% of the target population. (Lippman, 2003; Shoemaker, 2003) through pricing strategies. The participants completed a questionnaire of the factors influencing loyalty to a particular store. With all the money spent on loyalty programs, and Panelists were asked to pick their favorite store related pricing strategies, intended to build trial and (defined as the store where they purchase at least loyalty, a search of the literature was done to 50% of the grocery products), from a pre-defined list compare the consumer‘s view of loyalty to the of stores in the region. The shoppers also chose from program rewards offered. In addition, a survey was a pre-defined list of choices the factors that led them conducted to measure the effectiveness of the factors to the store. The list of factors was based on the discussed above. previous research, as well as informal discussions on this topic. In total there were ten questions, with four Consumer’s view of loyalty additional questions on general demographics, In an article by Lal and Bell (2003), they including income, education, occupation, and present a study conducted with a grocery chain in the location (geographic region) where the participant mid-west. The study reviewed frequent shopper card lives. Selected results seen in Table 1. data to evaluate the response rate of several TABLE 1: FREQUENCY OF RESPONSES TO promotions offered to frequent shoppers. The QUESTIONS 2, 6 program offered rewards during three promotional Question 2 - Why do you % of % of periods: a ham in the spring, a discount coupon in the shop? 106 29 summer, and a turkey in the fall. The purpose of all Good selection 20 19% 69% these rewards was to increase the shopping basket Location 19 18% 66% size of the most frequent shoppers. While the Convenience 15 14% 52% program did not significantly improve the behaviors Good everyday prices 15 14% 52% among the best shoppers, it did increase sales among In-store environment 12 11% 41% less frequent shoppers. Good sale prices 11 10% 38% What was determined is that the best customers Friendly employees 8 8% 28% already qualified for the reward without changing Other 6 6% 21% their behavior. So, although the rewards increased 10 sales on less frequent shoppers, the chain lost money Total Responses 6 on their best shoppers by rewarding them, even Question 6 Why would % of % of though there was no change in behavior. The you switch? 84 29 reduced prices and product giveaways did not incent Good selection 22 26% 76% additional purchases. Good everyday prices 20 24% 69% Recent Survey Good in-store environment 13 15% 45% Good sale prices 10 12% 34% Recently a survey of loyalty factors was conducted Friendly employ 10 12% 34% with grocery store shoppers in South Central Better loyalty card program 5 6% 17% Pennsylvania. The questionnaire was tested with Other 4 5% 14% students in a DBA program, as part of an Advanced Total Responses 84 Marketing Research class. The survey questionnaire Note: Respondents were permitted to choose more was then administered through a web-based tool to than one reason in each of the two questions Faculty and Staff in the Business Administration
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presented above. For question two, there were a total reward program, and the related pricing strategies of 106 reasons chosen, among the 29 completed meant to attract and maintain their shoppers. questionnaires, and in question six there were 84 reasons chosen among the 29 completed What then does influence shoppers to choose one questionnaires. store over another? In this survey, the primary reason was the location of the store. In informal Several questions in the study contradict the reward follow-up discussions with the participants, they program outcomes. First, less than 40% of the indicated that in many cases, they had no other participants are influenced by the loyalty program at reasonable options. Other reasons shoppers choose their favorite store. When asked if the shoppers are one store over another include the product assortment influenced by the existence of a loyalty card, only (not necessarily that the store carried every item 38% admitted to shopping at their favorite store available but that they carried the products the because of the loyalty program. shopper wanted), a good in-store environment, and friendly employees. These specific results are similar On a different question, shoppers were asked about to results from other studies in the literature. the factors that influence the choice of their favorite store. More than 30% of participants‘ favorite store Literature examples of shopper results is based on location or convenience. While Despite the rewards and the focus many marketers convenience did have different meanings for some of are placing on these programs, Dowling and Uncles the participants, for example some thought of (1997) propose that companies would be more likely convenience as store format, in this context, the to improve loyalty and motivate buyers if they majority thought of convenience as another term for focused on building the perceived value of the goods location. In addition, 19% picked good assortment as or services. the reason they chose their favorite store. In fact, only 24% picked a pricing reason – either good Other factors impacting repeat purchases identified everyday prices (14%) or good sale prices (10%) – as by consumers include satisfaction with the services the reason they chose their favorite store. This provided, building of some emotional involvement in seems to indicate that a majority of the shoppers in the product or decision, and finally, at times, a lack of this survey are not influenced by a reward program, alternatives from which to choose. There are many or the related pricing strategies employed by the references in the literature to the increased likelihood retailers. of repeat purchases from customers who are satisfied with the goods and services provided (Naumann, Another related question in the survey asked Jackson, & Rosenbaum, 2001; Schultz & Bailey, shoppers about the factors that would cause them to 2000). Therefore, instead of building reward change stores, if a new store opened next to the programs that give product away at reduced prices, existing store. Since location is not a factor here retailers should focus on programs that improve the (stores would be co-located), distribution of the customer experience and drive satisfaction. remaining factors distribution. Non-pricing factors CONCLUSIONS AND RECOMMENDATIONS increased from 38% to 53% as reasons to switch. For FOR FUTURE RESEARCH example, good selection increase in importance from 19% to 26%; good in-store environment increased Regarding the model presented to dispose of excess from 11% to 15%; and friendly employees increased capacity (Kim, Shi, & Srinivasan, 2004), while it was from 8% to 12%. Of note, pricing factors only not discussed, there may be application to retailers increased from 24% to 36%. In addition, only 6% of with excess inventory. Could the product be shoppers said they would switch if the new store had provided to their best customers at a better price? a better loyalty program. These results are hardly a Certainly there are issues, such as products that are ringing endorsement for the money spent to build the not attractive (or perhaps the inventory would not be
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in excess), or the buying cycle of the product (it may rewarding customer loyalty can pay off handsomely not be purchased on frequency needed to relieve the for you and them. Restaurant Hospitality, 87(8), 60- inventory pressure), but the idea seems viable for 62. future research. Kim, B.D., Shi, M., & Srinivasan, K. (2004). The idea of micro-marketing discussed by Lippman Managing capacity through reward programs. (2003) bears further investigation to determine how Marketing Science, 50(4), 9503. to execute different promotional plans at different Kim, B.D., Shi, M., & Srinivasan, K. (2001). Reward stores in the same chain. The concept takes into programs and tacit collusion. Marketing Science, account the need expressed for more individualized 20(2), 99. execution. Lal, R. & Bell, D.E. (2003). The impact of frequent Although the concept of using over-capacity as a shopper programs in grocery retailing. Quantitative reward (Kim, Shi, & Srinivasan, 2004) is most often Marketing and Economics, 1(20), 179. mentioned with hotels and airlines, the idea is moving to other industries, such as grocery retailing. Lippman, B.W. (2003). Retail revenue management: The idea would propose grocery retailers develop Competitive strategy for grocery retailers. Journal of pricing strategies that vary based on the target Revenue and Pricing Management, 2(3), 229. audience, and the location of the store. Then Mattila, A.S. (2001). Emotional bonding and promotional plans could further be developed to take restaurant loyalty: There‘s a big difference between a advantage of the individual needs of the local target. loyal customer and a frequent one, and the shrewd In another vein, if the stated purpose of loyalty and operator will figure out how to earn and sustain reward programs is to build sales and profits among guests‘ loyalty. Cornell Hotel & Restaurant best shoppers, then the cost of programs must be Administration Quarterly, 42(6), 73-79. evaluated. However, if the programs also provide Naumann, E., Jackson Jr., D.W., & Rosenbaum, M.S. other benefits, then perhaps additional investigation (2001). How to implement a customer satisfaction should be conducted and published to discuss other program. Business Horizons, 44(1), 37-46. values for the reward programs. For example, there is a variety of data collected throughout the loyalty O‘Brien, L & Jones, C. (1995). Do rewards really card process. First, at signup, and then as purchases create loyalty? Harvard Business Review, 73(3), 75- are tracked, a pattern can be developed that marketers 82. can use to better understand their frequent shoppers, Schultz, D.E. & Bailey, S. (2000). Customer/brand and the micromarketing programs described loyalty in an interactive marketplace. Journal of elsewhere in this paper. Advertising Research, 40(3), 41. REFERENCES Shoemaker, S. (2003). The future of pricing in Dowling, G.R. & Uncles, M. (1997). Do customer services. Journal of Revenue and Pricing loyalty programs really work? Sloan Management Management, 2(3), 271. Review, 38(4), 71-82. Wansink, B. (2003). Developing a cost-effective brand loyalty program. Journal of Advertising Fowler, M. (2003). Fifteen critical success factors for Research, 43(3), 301-309. real-time customer loyalty: With thoughtful planning,
Jefrey R Woodall is a Business Analyst for Procter & Gamble and an Adjunct Professor of Marketing at York College of Pennsylvania. He received his MBA from York College of Pennsylvania, and is pursuing his Doctorate in Business Administration from Argosy University @ Sarasota. He has presented and published papers on a variety of Marketing and Management topics, with a focus on Consumer Behavior and Loyalty.
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DETERMINANTS OF CLASS PARTICIPATION: A PRELIMINARY INVESTIGATION Justin C. Matus, Wilkes University Robert D. Kuschke, University of Missouri – St. Louis
ABSTRACT
The purpose of this study was to develop an instrument which measures a student‘s inclination or tendency to participate in class. Class participation was self-defined by the respondents. A convenience sample of 168 undergraduate students enrolled in a Northeastern United States mid size regional university completed a self- administered questionnaire which included 5 demographic items, 21 items measured on a 5-point Likert scale and 1 open ended question. Factor analysis was performed using principal component extraction with Varimax rotation. Six factors were extracted with a total explained variance of sixty-six percent. Four items were recoded and two other items were dropped from the analysis. The 19 remaining items resulted in a Chronbach‘s alpha reliability estimate of .806.
INTRODUCTION equal, a more mature (older) student is likely to participate more. Yet obviously in the here and now Whether it was Socrates in ancient Greek times or having this knowledge does nothing for the teacher or today‘s teacher in an on-line class, the value of a student desirous of increasing their participation student participating in class has always been beyond waiting for one to grow older. It seems we recognized as a significant element of the learning need a new model for understanding class process. Yet many teachers struggle with, or worse, participation in a more generalized form rather than simply ignore the students whose participation is less looking at individual determinants. What the authors than vigorous and robust. Yet at some level it is have attempted to do in their research is to develop understandable that a teacher may feel these non- an instrument that measures a student‘s general participators are simply unreachable because we proclivity to participate in any class. The hope is that perhaps have not fully come to understand and by first understanding class participation in a appreciate why a student does or does not participate. generalized form can we then and only then, develop It is also perhaps true that many teachers feel it is too an effective generalized teaching strategy that will difficult to adjust their teaching methods to a near increase class participation and concomitantly customized individual level that accounts for all the increase learning. various reasons, both obvious and nuanced, that keep a student from participating. Put simply, even if one METHODS & INSTRUMENT DEVELOPMENT could discover the exact reason for each and every student‘s own particularly unique reason for not The instrument the authors willingly stipulate is in participating, it would still be simply too difficult to the developmental stage. Accordingly, many of the then implement an effective teaching strategy in items in the instrument may seem redundant , response to the many, many unique requirements however the authors wish to point out that in across a class of twenty or thirty or even more developing the items it was felt more prudent to students! include rather than exclude items in the preliminary stages of the investigation. The 21 Likert scale items Research has already shown us many, many of the were developed collaboratively by the authors who so-called determinants of class participation (Weaver collectively have approximately 25 years classroom & Qi, 2005; Dallimore, Hertenstein, & Platt, 2004). teaching experience and are representative of several Age for example indicates that all other things being
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different disciplines (science education, business Table 1 technology, business strategy). Item # Statement Mean A convenience sample of 168 undergraduate students Response enrolled in a Northeastern United States mid size 1 I view myself as a strong 3.57 class participator regional university completed a self-administered 2 My teachers would say I 3.54 questionnaire which included 5 demographic items, am a strong class 21 items measured on a 5-point Likert scale and 1 participator open ended question. The students were instructed to 3 I participate more when the 3.76 answer the survey questions in a generic context class size is small rather than answering the questions against the 4 I would like to participate 3.36 more often in class backdrop of the particular class and/or teacher they but am hesitant to do so had in class that day. Respondents were assured of 5 I don‘t mind when my 3.36 anonymity and no individual identifying information teacher calls on me, even was collected. if my hand is not up 6 I feel that participating in 3.68 ANALYSIS AND RESULTS class helps me learn 7 I feel my level of class 2.95 The data was analyzed utilizing SPPS 15.0 software. participation is an accurate Analysis included descriptive statistics, frequency reflection of my abilities 8 I feel class participation is 3.15 distributions, factor analysis and reliability analysis. best defined as answering The average age of the respondent was 20.82 years questions in class while 62 percent of the respondents were male and 38 9 I feel class participation is 3.23 percent were female. The sample population best defined as asking included approximately 28 percent freshman, 2.5 questions in class 10 I feel class participation is 3.60 percent sophomores, 47 percent juniors, and the best defined as paying remaining 22 percent were seniors. 59.5 percent of attention in class the sample population were Business Administration 11 Class participation has a 3.40 majors, 27.4 percent Accounting, 7.7 percent direct effect on my grade Entrepreneurship and the remaining 5.4 percent were 12 Class participation is a key 3.53 described as other. to earning a higher grade 13 I feel class participation 3.10 Table 1 contains mean responses for the 21 Likert should not be a factor in determining a final grade scale items. The highest mean response was item 14 I feel class participation 3.50 18Which read, ―My participation level depends on can not be accurately my interest in the class‖ with a score of 3.98 on 5 measured point scale (1 = strongly disagree; 5 = strongly agree) 15 Compared to other students 3.29 while item 17, ―Compared to other students I I participate more 16 Compared to other students 3.17 participate less ‖had the lowest mean response score I participate equally of 2.26. One surprising item, was item 5, ―I don‘t 17 Compared to other students 2.26 mind when a teacher call on me, even if my hand is I participate less not up‖ which had a mean response score of 3.36. 18 My participation level 3.98 depends on my interest in the class 19 My participation level 3.60 depends on my interest in the instructor
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Table 1 Continued Item # Statement Mean • Rotated Component Matrix(a) Response • Component 20 If I know the answer to a 3.11 • 1 2 3 4 5 6 • q1 .831 .233 .075 .066 .096 -.078 question I always raise my • q15 .792 .179 -.034 .148 .129 -.189 hand • q2 .773 .285 .018 .007 .108 -.115 • q17 .697 .103 -.090 .067 .198 .282 21 If I know the answer to a 2.49 • q5 .462 .344 .237 -.269 -.019 .195 question I rarely raise my • q11 .140 .824 -.043 -.025 .046 .017 hand • q12 .166 .796 .066 .047 .194 .176 • q7 .284 .693 .136 -.074 -.101 -.120 Scale = 1- Strongly Disagree 2- Disagree 3- Not • q6 .233 .685 .276 -.001 .193 .063 • q13 .247 .531 -.024 .024 .239 -.330 Sure 4- Agree 5- Strongly Agree • q9 -.034 .120 .850 -.109 .119 .025 • q8 -.088 .246 .737 .113 .016 -.111 • q10 .277 -.267 .568 .262 -.194 .118 The initial factor analysis was performed using • q19 .005 -.015 -.005 .879 .102 -.037 principal component extraction with Varimax • q18 .142 -.046 .114 .824 -.018 .119 • q20 .120 .136 .112 .057 .873 -.062 rotation. Initial inspection of the first-run factor • q21 .470 .153 -.095 .040 .692 -.013 • q16 -.054 -.088 -.002 -.032 -.052 .789 analysis results indicated several variables with • q3 .013 .268 -.024 .353 .005 .499 negative correlations across eights factors extracted. • Extraction Method: Principal Component Analysis. • Rotation Method: Varimax with Kaiser Normalization. A reliability analysis was also performed indicating • a Rotation converged in 6 iterations. which items should be dropped from the analysis. Upon recoding items 6,7,17 and 21 (1=5; 5 = 1) and • Table 2 dropping items 4 and 14 a final reliability analysis and factor analysis was performed. The 19 remaining Component Initial items resulted in a Chronbach‘s alpha reliability Eigenvalues estimate of .806, a reliability level generally % of Cumula- considered acceptable and well above the .70 level Total Variance tive % suggested by Nunnally(1967). Table 2 displays the 1 5.157 5.157 27.143 rotated component matrix and Table 3 displays the 6 2 2.008 2.008 37.713 extracted components with their respective eigen 3 1.869 1.869 47.548 values and percent variance. Results of the open- 4 1.359 1.359 54.699 ended question were not analyzed for this portion of 5 1.263 1.263 61.347 the study. 6 (Table 3) 1.019 1.019 66.710
DISCUSSION
While many of the individual items are of interest in their own right such as the high and low mean score items previously mentioned, the focus of our analysis will be on the six factors (see endnote on factor analysis methods). The authors have also refrained from labeling the factors for the very reason that the labels can be very subjective and misleading. The authors prefer that the reader draw his or her own conclusions about what the factors mean.
The first factor had the highest loading 5.16 and accounts for 27 percent of the total variance. The five items (1, 2, 5, 15, 17) contained in this factor all seem to speak to the student‘s own self perception of how the behave in the classroom environment. In
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other words, this factor is a student‘s own subjective desirable. The use of a non-representative sample of measure of self; it is as if the student is saying, ― I college students which did not include other areas of participate a lot because I say I do‖. This would lead the curriculum such as the arts or humanities as well us to suggest an interesting follow up study to as graduate level students limits the generalizabilty of measure the correlation between this subjective our findings. A more conservative methodological measure versus some other objective measure. e.g. , approach would yield fewer factors and we agree that how often does this student actually raise his/her additional refinement of the instrument itself as well hand in class? as larger and more representative sampling is needed.
The second factor had a loading of 2.01 and CONCLUSIONS accounted for 10.5 percent of the total variance. The 5 items (6, 7, 11, 12, 13) in this factor relate to The first question that remains in our minds is, have aspects of a student‘s performance. This factor may we actually measured what we have sought to suggest that if a student realizes a cause and effect measure? Can one truly measure the inclination to relationship between participating and performance participate in class? We hold out the hope that yes, (or at least grade performance) then that student may one can indeed measure anything, including the indeed have an inclination to participate. inclination to participate. And while we will allow that it is ultimately up to the reader to decide, in our The third factor had a loading of 1.87 and accounted judgment this instrument could be used gainfully for 9.8 percent of the total variance. The 3 items (8, either in whole or in parts (factor 1 for example) in a 9, 10) in this factor relate to how one defines class classroom setting to form an initial baseline measure participation. The authors will note here that in from which a teacher could then begin to develop discussions at an earlier conference presentation of some adaptive strategies, based upon his/her findings. the study results a criticism of the methods was that class participation was not defined for the student For example, a teacher could measure a class of completing the questionnaire The study authors students with this instrument and construct a however felt strongly that in their attempt to craft a summative scale score, i.e., a class participation generalized measure of a student‘s tendency to score, for each student on the first day of class. The participate it is imperative that class participation be teacher would subsequently give a chapter exam in fact, a self-defined concept, not a proscribed one. three weeks later and based on the chapter exam scores could develop a grid quadrant as illustrated in The fourth factor had a loading of 1.36 and accounted Figure 1. The teacher could then at least begin to for 6.6 percent of the total variance. The items (18, understand and prioritize his/her strategy(ies) with 19) speak to a student‘s level of interest. Factor 5 particular emphasis on those students in quadrant IV had a loading of 1.26 and accounted for 6.6 percent (low test score/low participation score) and those of the total variance. The items (20, 21) are student in quadrant III (low test score/high essentially identical and address a student‘s level of participation score). The teacher could at least knowledge. The sixth factor had a loading of 1.01 recognize that for the students in quadrant III and accounted for 5.36 percent of the total variance. participation in and of itself is apparently not the The items (3, 16) do not seem to gel around a problem. Perhaps it is an issue of concept particular concept although the effect of class size on understanding or resources. The students in class participation is noted. Quadrant IV on the other hand, might simply be best served by some targeted encouragement to participate LIMITATIONS more often, or use creative avenues to participate, such as a writing down their questions during class The sample size (n = 168) greatly limits our findings, and turn them in at the end of the class period. especially as it applies to procedures such as factor analysis where sample sizes of 200 or greater are
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By defining the dimensions of class participation the focus is narrowed for the respondent. In the end, careful assessment and analysis of student participation will require a comprehensive framework
2 1 that accounts for the many individual and situational High High Performance influences.
The authors realize that class participation is similar to learning styles and that there is not a ―one size fits 4 3 all‖ approach. During the study it was apparent that while students recognized the value of participating in class they believed it is unfair to actually attach a Low Participation High Participation Low PerformanceLow grade to class participation. Figure 1 Like the question the authors initially asked, ―Have Indeed, the authors very reason for developing this we actually measured what we sought out to instrument for measuring class participation was born measure?‖ the same can be asked about class from the need to appropriately assess the participation in general, ―Can it be measured?‖. The effectiveness of a new technology designed to authors believe that with continued adjustments a enhance class participation, the so-called clicker research a tool can be developed to help both teachers technology or classroom response systems. This and students work to build a meaningful and emerging technology is slowly being adopted in more measurable class participation tool. and more classroom settings with some mixed results (Wood, 2004; Stuart, Brown& Draper, 2004; Brown, REFERENCES 2004). Many feel that the anonymity provided by the classroom clicker technology can be especially Brown, K. (2004). Technology: Building interaction. effective at engaging precisely this student, the TechTrends, 48(5), 36-38. quadrant IV type. Dallimore, E. J., Hertenstein, J. H., & Platt, M. B. Finally, the authors agree that much more research is (2004). Classroom participation and discussion needed. Issues such as the definition of participation effectiveness: Student generated strategies. and the measurement therein continue to be debated. Communication education, 53(1), 103-115. The authors are currently refining this instrument and Field, A. (2005). Discovering statistics using SPSS. are contemplating developing a second instrument Sage Publications (New York). which takes an opposite approach wherein participation is in fact specifically defined along Nunanlly, J. C. (1967). Psychometric theory. multiple dimensions and students would then be McGraw-Hill (New York). asked to self-report the strength of their participation. For example, a student might be asked to rank their Stuart, S. A., Brown, M. I., & Draper, S. W. (2004). participation on a one to ten scale (1 = not at all; 10 = Using an electronic voting system in logic lectures: very often) on the following items: One practitioner‘s application. Journal of computer assisted learning. 20(2), 95-102. I come to class having read all assigned readings Weaver, R. R. & Qi, J. (2005) Classroom I raise my hand when I know the answer to a organization and participation: College students‘ question perceptions. I offer comments relevant to the discussion The Journal of Higher Education, 76 (5), 570-601. I attend class
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Wood, W. B. (2004). Clickers: A teaching gimmick that works. Developmental Cell, 7, 796-798. Endnotes methodology in instrument development or factor analysis and other data reduction techniques. The authors‘ purpose in this paper is to first and However, the authors respect a valid criticism that foremost present the data in something much closer much more work needs to be done in terms of to its raw form with a minimum of data developing a larger sample and more stringent transformation and data reduction. The paper is criteria for including variables into a more refined specifically not intended to be a discussion of instrument.
Justin C. Matus, is an assistant professor in the Sidhu School of Business and Leadership of Wilkes University. Robert D. Kuschke is at the Center for Teaching and Learning at the University of Missouri – St. Louis
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START YOUR OWN BUSINESS: A SYNTHESIZING FINAL GROUP PROJECT IN AN INTRODUCTORY BUSINESS COURSE Leon Markowicz, Lebanon Valley College ______
ABSTRACT
In Business 130, Modern Business Organizations, the first course required of Business Administration and Accounting majors, the last major assignment is an activity in which groups of students create a proposal for starting a business. Assigned to groups, students decide what kind of business they want to start and seek funding. Their written proposal covers the main areas of the text, with resumes included in an appendix. Their oral presentation highlights the main points of the written proposal. This project introduces them to a ―continuum‖ that runs through our four-year program. ______
INTRODUCTION - Gain a basic understanding of the central functional areas of business administration including, In the first required course for Business organization and structure, finance, human resources, Administration and Accounting majors at Lebanon management, marketing, and technology. Valley College, the final major assignment asks students, assigned to groups, to secure funding to -Examine and explain the managerial environment of start a business. businesses including the international aspects of the role of ethics and social responsibility in conducting The following sections contain: The Course business. Description and Course Objectives, the Assignment, the Purpose of the Group Project, Minutes, Problems, -Begin to acquire the skills employers expect of Group Participation Feedback Sheets, the Written college graduates: Report, the Oral Presentation, Student Feedback, and Faculty Impressions. COMMUNICATIONS: oral, written, interpersonal, small group. Course Description and Course Objectives for Business 130 COMPUTER SOFTWARE: word-processing, spreadsheets, presentations, and internet. The course context for the assignment appears in the course description and in the course objectives. CASE STUDIES: know and apply models to analyze cases. Course Description PERSONAL: conventions, etiquette, and An examination of the functional areas of business expectations. administration with an emphasis on management. The course focuses on understanding the composition PROFESSIONAL: understand business issues and of business operations with respect to management, vocabulary; networking and building a career; structure, leadership, and interpersonal relationships technology skills necessary for business.
Course Objectives Assignment for the Group Project
Upon completion of the course, students should be Students are assigned to groups of four to six, able to: depending on the size of the class, to accomplish the following task:
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BUS 130 Resumes of key company personnel (students) should SPRING 2007 be included in the proposal. Each student in the group GROUP PROJECT will have their resume included. Resumes should be Your group is responsible for developing a proposal factual and accurate. requesting money from private investors to capitalize The paper should be between 15 to 20 pages of a small business. The objective is to determine the content and the proposal should be single-spaced. type of small business you want to start and develop Resumes, charts, graphs, and supplemental material a proposal to seek funding. Each group will submit a can be placed in the back in appendices. written proposal and present a summary of the proposal to the class in a short presentation. Microsoft PowerPoint should be used in the class presentation. Two copies of the PowerPoint Your group may choose any type of business with the presentation should be handed in your group exception of bars, restaurants, and liquor stores/beer presentation, six slides on each page. distributors. The proposal should fully explain your company by incorporating concepts and themes from The project is worth 20% of your grade. The written the textbook and class lecture. Content might include portion of the proposal is due the first class period topics such as business structure, social that presentations are scheduled. The class responsibility, explanation of the actual presentation should last approximately 15-20 minutes product/service, marketplace opportunities, the 4 P‘s (including time for questions). Each group member of marketing, the use of technology and computers, will speak and the group‘s PowerPoint presentation accounting and finance, and use of human resources will be presented. Refer to the syllabus for (operations). presentation dates.
You will evaluate fellow group members during the Purpose of the Group Project semester. Members who do not participate fully can have their group project grade lowered to the point of The primary purpose of the Group Project is for failure by the professor based on group member students to synthesize and apply the concepts and feedback. theories they are reading about and being tested on. The Group Project also builds a base for a The group will determine the content and structure of ―Continuum‖ that runs through their courses in the the proposal. Follow five guidelines: department. The Continuum focuses on activities and skills students will develop and use in college and, The proposal should be proofread and edited. It after that, in their personal and professional lives. should have smooth transition between sections and all parts should be seamlessly integrated in style, Those activities include minutes, case studies, and form, and design. The document should be group work; the skills include time management, professional with consistent fonts, page numbers, and organizational skills, and, the focus of the sub-headings. department, communication skills: writing, speaking, and professional and interpersonal communication. The proposal should include spreadsheets from Microsoft Excel illustrating a mock balance Minutes (See Appendix A) statement and profit/loss statement based on your hypothetical financial projections. Develop the Since the students meet out of class for the project, statements to show where the company will be one they submit minutes of all meetings within 24 hours. year after start-up. Each group should have a solid Minutes are sent to all group members and the revenue model to show how the company will make instructor. Each student must do the minutes before money (and how much). anyone does them a second time.
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The minutes provide the group with a record of who information is anonymous. At the next class, the did what, what needs to be done, who will do what, students receive the feedback. when they are due, as well as a record of progress, problem solving, and decision making. These sheets allow students to look at how they perceive their own performance and to look at how The minutes provide the instructor with information their group members perceive that performance. At on how often a group is meeting, who is doing what, first, students are afraid to give that feedback, but who are the most active participants, who are the after they learn to focus on their peers‘ behavior and least active participants, what progress the group is not on the person, they give accurate, direct, and making, what difficulties the group is facing, how honest feedback. Often, students who are not meeting effectively the group identifies and solves problems the group‘s expectations respond to the feedback by and makes decisions. The instructor returns the improving their performance after they receive the minutes the next class with feedback on the group‘s first feedback sheet. progress and on the minutes as written communication. Later, students fill out the feedback sheets halfway through the project and again after the project is Problems completed. The assignment for the group project contains a statement that ―Members who do not Since the students, usually first semester first-year participate fully can have their group project grade students, do not have much experience working in lowered to the point of failure by the professor based groups outside of class on a project this size, groups on group member feedback.‖ The instructor also tend to get a late start and to meet infrequently. Some reserves the right to raise a student‘s grade. students come late to meetings, some do not attend meetings, some do not do the work on time, some do At first, students are hesitant to give feedback to their not do the work at all. peers, but as the semester progresses, they become more forthright. The students, on the whole, In the groups, one person may dominate, and others overestimate the grades for themselves and their may not speak up and contribute to the group‘s peers. performance. Since students, in general, are not used to holding their peers accountable and since peer One of the most positive things about these sheets is pressure is so strong, they often are afraid to say how honest students are with themselves. They see anything to their colleagues about their performance. themselves very clearly and are not afraid to put it in To deal with this, the instructors use a Group writing. Participation Feedback Sheet. Written Report Group Participation Feedback Sheets (See Appendix B) In addition to the requirements stated in the assignment, the written report must have a letter of After the groups have met twice, each student fills proposal, a table of contents, and an executive out a Group Participation Feedback Sheet on summary. Here are the names of some of the him/herself and on each group member. The form is businesses groups wanted to start: JAABZ Dance on Blackboard, so students type the information, print Club, The FLix – Drive-In Movie Theater, Clean Cut the sheets, and give them to the instructor. The (Barber Shop), Monkey In The Middle (Sports instructor transcribes the information from the other Apparel), Smooth Flava (Food and Beverage), Lords students‘ sheets to the sheet the individual filled out of Landscaping, Brian‘s Surf Shop, Valley on him/herself. The comments are cut off the sheets Transportation Company, Colonel Custard‘s Last from the other students and put in an envelope, so all Stand, JSA Land Development (multi-unit housing), Legends (restaurant), Custom T-Shirts, The Arena
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(indoor and outdoor entertainment complex), The effective, useful, or helpful, and what they think was Mile High Club (live bands and disc jockeys), ineffective, not useful, or not helpful. Mommy To Be Day Spa. That feedback appears in Appendix C. To help the students prepare the financial material required, some instructors ask a commercial loan Faculty Impressions/Feedback officer from Fulton Bank to review the students‘ The Group Project is an invaluable learning tool for numbers. Two weeks before the project is due, the first semester majors; they learn by doing. All the students send the financials to the instructor in an concepts and theories come alive in their proposals. Excel attachment; the instructor sends them to the The project brings all the material read about and loan officer who reviews them, then visits the class tested on together and integrates it into a unified and meets with each group individually, so the other whole. groups do not see how that group is working. The Group Project is extremely effective in laying a Oral Presentation foundation for the rest of the students‘ development For the oral presentations, which take place during in the department. Resumes, for example, are done in the third last and second last class periods or during at least three other courses, so the student can see the time scheduled for the final exam, males must where they started and how they are progressing. wear jackets, dress slacks, shirts and ties. In one Group work, reports, and oral presentations occur in class, all male students wore suits. Females must other courses including Organizational Behavior, wear professional attire: dresses, suits, jackets. International Business Management, Management Information Systems, Strategic Management, Each student is responsible for the technology s/he is Governmental and Nonprofit Accounting, and using, e.g. PowerPoint Intermediate Accounting.
Student Feedback Case studies, including the current case studies students read about in The Wall Street Journal, In an attempt to find out what the students thought appear in many courses, and, with this project, the about the group project, they were asked what students create their own case study. semester and academic year they took the BUS 130 class, what they thought was effective, useful, or The minutes and group participation feedback sheets helpful, and what they thought was ineffective, not are new elements and experiences that they will use useful, or not helpful. in other courses and in the world of work.
After that, they were asked what semester and academic year they are now, what they think was
Leon Markowicz is a professor of business administration at Lebanon Valley College. He received his Ph.D. in English Literature from the University of Pennsylvania. His research focuses on integrating writing, speaking, and cooperative learning into business and economics courses.
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Appendix A Business 130: Modern Business Organizations Spring 2007 Examples (C) and Format (O) for Minutes
Business 185-3 Minutes of Group A (Use this also as email Subject)
Present: Jim Jones, Amy Abbey, Curt Short, Joe Long (full names)
Absent: Sam Schwartz Late: Joe DeLay
Group A met on Monday, February 7, at 1 p.m. in the library.
Body Paragraph 1
Ineffective
We met to make the necessary corrections to our first draft.
Effective
Next, the group viewed the document on the computer, while making headings and spacing uniform.
Body Paragraph 2
Ineffective
We split the sections.
Effective
We decided which group member will be responsible for which section:
Jim – marketing, Amy – financing, Joe – human resources, Curt – sales, Sam - operations
Body Paragraph 3
Ineffective
The group addressed general questions and decided on a recommended course of action.
Effective
Additional work was assigned to Jim and Amy. Jim is going to calculate the personnel costs. Amy is going to do the income statement.
The meeting ended at 1:55 p.m.
Group A will meet next on Wednesday, October 9, at 4 p.m. in the library.
Respectfully submitted,
Joe Long, Recorder
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Appendix B
Group Participation Feedback
My Name:______Full name of person receiving feedback: ______
Course:______Group:______Date Report Turned In: _____
Please check the appropriate box to rate person‘s performance.
1 – Consistently fails to meet expectations
2 – Occasionally fails to meet expectations
3 – Consistently meets expectations 1 2 3 4 5 4 – Consistently meets/occasionally exceeds expectations
5 – Consistently exceeds expectations
Amount of participation Quality of participation Willingness to work with others Ability to work with others Volunteers to do things Accepts responsibility Fulfills responsibility Listens well Communicates well Attitude Meetings missed: Meetings late:
Rate percent of work done (0% - 100%): Suggested Grade %
(Total for the group = 100%)
Comments (3 required; 1 suggestion)
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Appendix C
THEN: First semester freshman
Effective: The realization of how a group project in college is different than a group project in high school.
Ineffective: The professor failed to provide a clear expectation for the project.
NOW: First semester sophomore
Effective: It made me realize what my strengths and weaknesses are in term of working with others and how I represent myself as a team member.
Ineffective: I had yet to gain the skills of effective communication back then, so I did not know how to communicate well with my group members when we had problems.(the L.E.T. book would had been a good resource to have).
THEN: First semester freshman I found this project to be effective in helping me realize what was to come in future business classes.
I thought that the material that was included in the project could have been taught to us better before starting the project.
NOW: First semester sophomore
I am glad that we did this project so early, because it helped my group skills which I have used many times since then.
I still think that I was not educated enough on the material to have made an effective business plan.
THEN: Semester 1, Freshman Year
I found that this project was effective in helping me learn how to work better with others.
I found that this project was ineffective in making me a better public speaker or any better with dealing with conflicts inside the group.
NOW: Semester 1, Sophomore Year
I found that the last project, in which I worked with Stephanie, that we were able to take each other's ideas and formulate one better idea. This improved my teamworking abilities because when we had a conflict, we worked through it together to find a simple solution.
I found this project ineffective because Stephanie and I could not help each other in the presentation. We could improve each other's ideas but we did not give any feedback on the way the other person speaks in front of the class.
Then: First Semester Freshman
Effective: The project was effective in teaching group work. I also think that it was a good opportunity to practice public speaking.
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Ineffective: At the time, I did not think that the project was effective in applying the concepts that we learned in the book.
Now: First Semester Sophomore
Effective: I think it was effective in teaching concepts like group planning, report division and communication. Our group also had a leader, but we made decisions as a group.
Ineffective: One ineffective thing about the project was the lack of format and set-up guidelines for the report.
Then: first semester freshman
Effective: I met friends in my major who I talked to because they were in our group. Speaking in front of the class helped jumpstart my presentation skills.
Ineffective: Any information put into the project didn't seem relevent to the text. I was lost except for looking at examples of previous business plans.
Now: first semester sophomore
Effective: The project shows me how little skill I have for writing. Comments from Then: are still relevent.
Ineffective: Work between the group members was not evenly distributed. Classes taken second semester freshman year would have helped to better plan the layout of the PowerPoint presentation.
Then: First semester freshman.
Effective: Teaching us how to use and connect all concepts and theories of the course together in one project. Allowed us to apply our knowledge in a real workplace situation rather than just reading it, memorizing it, and then writing a test.
Ineffective: At the time, I thought that the fact that we were not able to choose our own group was ineffective. Many groups did not work well together and some people did not pull their own weight. Not knowing or getting along with the people we worked with caused uncomfortable and tense working conditions.
Now: First semester sophomore.
Effective: After a year, I have come to realize that working with the people I was told to actually helped me. It forced me to adapt and deal with what I had in front of me. In the real world, we are not always able to pick and choose who we work with; so, this project exposed us to potential problems that may arise and helped us learn how to deal with them.
Ineffective: I still feel that everyone getting the same grade on the written business plan was ineffective. It allowed some members of a group to sit back while others did the work. There should have been more peer evaluations and individual grades on the written component of the project.
Then: Effective: The project made me realize how many different aspects went into actually starting and running a business.
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Ineffective: At the time I considered the project only as a grade and not as a learning experience.
Now:
Effective: I understand how much is expected of any person involved in business.
Ineffective: I didn't take advantage of the learning experience and missed important lessons.
Then: 1st semester Freshmen year
Effective: My first opportunity in college to work with others on a project. Encouraged me to communicate with others and share my ideas which I probably would not have done without this project.
Ineffective: Had a group member who did not complete their work to the standards of the rest of the group. Spent a lot of time determining what kind of business we wanted to create oppose to making a decision and committing to it.
Now: 1st semester Junior year
Effective: Prepared me for group work, projects, and presentations for several of my other classes. Gave me experience in presenting which makes me feel more confident in front of an audience.
Ineffective: I worried more about the length of my portion of the paper oppose to focusing on concise information and details. Now many my classes want objective precise papers and do not put much emphasis on length.
Then: First semester freshman
Effective: The group project helped me to understand the importance of communication in explaining a business idea to investors. My group worked together on different parts of the report and was able to blend them all together for the final report.
Ineffective: In the beginning of our group meetings, group members wouldn't show up or didn't have their part complete and therefore we had to postpone some of the parts.
Now: First semester sophomore
Effective: Towards the end of the project, group members had a specific role in the project and worked hard to fulfill each requirement. We all came together to help each other with our parts and picked up the slack in some areas we were procrastinating on.
Ineffective: We did not spend enough time preparing for the oral presentation and we tried to put too much information in the time allotted to us.
Then: Spring sophomore.
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I think it was effective at the time because it got us working in groups early in college and not wait until our senior year.
It was ineffective because we never had anything like the group project before and we had to figure everything out instead of getting some guidance.
Now: First semester Junior
I still feel the group project was effective because it got us working in groups early on.
Now I do not think there was anything ineffective about the project.
Then: Second semester freshman
The project was effective in giving me insight into the huge amount of energy and attention to detail involved in creating a business.
The project was ineffective as it required knowledge of accounting concepts that I was not familiar with at the time, making it difficult to prepare financial statements
Now: Sophomore
The project was effective but would be better suited for a higher level business course - when students are more likely to have been taught essential concepts from other classes.
Then: Freshman First Semester
This project gave me a chance to apply concepts from the textbook to help me better understand how they work in the great beyond.
Because no one in my group had ever taken or was currently taking an Accounting class, we did not know how to prepare a balance sheet and an income statement properly.
Now: Sophomore First Semester
This project encouraged me to search for information and perform more than the minimun, which are important in the business world today.
I was not educationally prepared to do the project because I did not have all the basic knowledge needed to complete it.
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ASSESSING WRITING ACROSS THE BUSINESS CORE Nancy Coulmas, Bloomsburg University of Pennsylvania Stephen Markell, Bloomsburg University of Pennsylvania William Neese, Bloomsburg University of Pennsylvania
ABSTRACT Both the Middle States and AACSB accrediting bodies have called for the assessment/assurance of learning related to student writing skills. Given this charge, our College of Business Curriculum Committee, which manages our Business Core, decided to assess student writing early in the Business Core program. Our goals were to help students understand the importance of good writing communication skills in business and help prepare them for the extended writing demands of upper division business courses. We selected the Managerial Accounting course as our business writing assessment target. This course is required for all business majors and is usually taken during the sophomore year. As part of the course process, students are required to write business memos and that became the basis for our writing assessment. This paper describes the development and implementation of our business writing assessment process, including the preparation of an assessment rubric and the results, analysis, and subsequent adjustments stemming from our trial run and our first full run.
INTRODUCTION class time instructing students on how to write from a business perspective. Even encouraging students to For several years, the companies that recruit and hire acquire a business writing text that addressed various our business program graduates have indicated that business writing topics (Murdick, 1999 and May, good written communication skills are essential in all 2006) did little to alleviate the problems. areas of the business world. In addition, both the Middle States and AACSB accrediting bodies have In addition, our university‘s English Department called for the assurance of learning related to student complained about their difficulties in teaching the writing skills (2002, 2003). business students enrolled in Composition II. Their dilemma focused on assigning research and writing As a result, in the late 1990‘s most of our College of projects. Ideally those projects should have topics in Business (COB) programs implemented writing areas of the students‘ major. The English faculty felt requirements throughout their major required ill-equipped to assess research and writing outside curricula. It was assumed that requiring a variety of their areas of expertise (i.e. English topics). Yet, they business writing assignments, along with the general also believed that assigning research projects focused education requirements of Composition I and II, on English topics was not conducive to student would serve as sufficient preparation for our students. learning regarding research and writing in their major field. THE PROBLEMS THE SOLUTION PROCESS Unfortunately, that assumption was found to be erroneous for two primary reasons. First, we found As a result of these problems, our College of that most students did not possess adequate writing Business Curriculum Committee (COBCC), which skills. Assigning a research project or a written case manages our Business Core program, elected to report or a business letter in any particular business become involved in developing a solution. We course did not ensure that students would write well decided to select a Business Core course (a course all or that they would learn from their mistakes. As business major are required to take), add a business professors, we found ourselves spending valuable writing requirement to that course, and use the
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writing assignment for assessment purposes. We The overall average score of our trial run was wanted to select a course taught early in the Business approximately 2.2, indicated a need for improvement Core program because we wanted to help students in the basic business writing skills of our students. understand, as early as possible, the importance of COBCC discussions with faculty teaching the good written communication skills in a business Managerial Accounting course resulted in the environment. In addition, we wanted to ensure that institution of a ‗do over‘ policy, as a first step students were prepared for the extended writing towards improving writing skills (Closing the Loop demands of the upper division business courses. Report, 2005).
With these goals in mind, the COBCC identified the The ‗do over‘ policy applied to the first memo Managerial Accounting course as our business written by the spring 2006 Managerial Accounting writing assessment target. This course is required for students. The policy was for students to write, word all business majors and is usually taken during a process, and submit the first memo for grading. student‘s sophomore year. As part of the course Students receiving a grade of 70 or less on the memo process, students are required to write three business were given the opportunity to correct and re-submit memos, providing us with a ‗ready-made‘ writing the memo for a higher grade. The goal was to assignment. The memos become more challenging demonstrate where students were making errors in as students progress through the class, so we selected their written work, with the expected result of the third (and last) memo as the basis for our business students improving their writing on the second and writing assessment program. third memos.
The Trial Run Plan Implementation and Results
The COBCC spent the spring 2005 semester During this same time period, the COB was dealing reviewing samples of writing assessment rubrics and with the Composition II issues. The University developing the rubric to be employed for our trial run Provost created a Written Communication Task assessment. See Table 1 Assessment Rubric. Force to study the issue from a university-wide perspective. The Task Force included two members We decided to obtain samples from each section of from each college, with the COB members selected the fall 2005 Managerial Accounting course for our from the COBCC. trial run. The Accounting Department typically offers eight sections of the course each semester, with Within this environment, the COB implemented the 30 – 35 students per section. By the time that the new ‗do over‘ policy for the spring 2006 semester. third memo is assigned, attrition brings the total Again, a sampling of 4 – 5 third memos from each course enrollment down to about 200 students per section was taken. Evaluation of 10 memos each was semester. We elected to sample 4 – 5 memos from undertaken by each faculty member of the COB, each section for the trial run. along with approximately 20 members of the COB Advisory Board. COBCC members (six in total) evaluated 10 memos each using the writing assessment rubric, such that The overall average score was approximately 2.5, each memo was evaluated twice. The committee meeting our initial short-term goal. However, we identified an overall average score of 3.0 as the long also analyzed each individual item in the rubric and range (3 – 4 years) goal, with an overall average discovered that the average scores per item was score of less than 2.5 being viewed as ‗problematic‘ widely varied. In three of the eight rubric items, and an overall average score of 2.5 of greater as students scored well below the 2.5 standard, ‗progressing to proficiency‘ (Assessment Report to indicating that further action needed to be AACSB, 2005). undertaken, both in curricular improvement and in the assessment process.
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OUTCOMES AND ACTIONS educational resources be made available for this process. Following two cycles of business writing assessment, there were a number of actions taken to try to help Our students have not been enrolled in the students improve their writing skills and to improve Composition II course for the last two semesters. our assessment process. The writing assessment During this time our Business Education Department process was an onerous task for the COBCC to take has developed a course in Business Communications on, in addition to its regular responsibilities. To that has subsequently been accepted as a substitute mitigate this problem, while still involving the for Composition II. This course is now required for faculty, the COB created an Assessment Committee majors in Business Education and Business to develop and implement assessment processes for Information Systems and has recently been approved all areas of our COB Mission Statement. as the second writing course for all COB majors, assuming the educational resources follow that The Assessment Committee re-worked the writing approval. assessment rubric in an attempt to improve the evaluation process. In addition, a COB writing We have come a long way, in a very short time, in assessment subcommittee was formed to incorporate developing the assessment of business student written the best COB evaluation of writing. This group communication skills. Both the process of requiring included faculty who were skilled at writing and business writing and the evaluation of that writing evaluating writing, along with business writing have taken a few years to develop and, during that experts from the COB Advisory Board. Thus, the period, we have learned a great deal about the writing assessment process itself was improved for assurance of learning/outcome assessment. We hope, the next round during the spring of 2007. as a collective faculty, to continue to learn as a means of improving the skills and abilities of our students. Another area addressed was the business memo assignment. The ‗do over‘ policy was deemed as REFERENCES somewhat successful and was continued. It was also decided that students would be required to acquire a Assessment Report to AACSB, Written business writing text, rather than recommending that Communication excerpt from the COB Report on students acquire it. In addition, students were to be Assurance of Learning, Fall 2005. provided with samples of the assessment rubric to be used to grade their memos, along with samples of Closing the Loop Report, Writing Assessment Report well-written business memos, and were encouraged to COB by COBCC, Fall 2005. to utilize the university‘s Writing Center to help them http://www.aacsb.edu 2003. prepare better written memos. Finally, the value attached to the business memos for final grading http://www.msche.org 2002. purposes was increased, in an effort to motivate students to focus on better writing. May, C.B. and G. S. May. Effective Writing – A Handbook for Accountants, 7th ed., Prentice Hall, While all of this was taking place, the results of the 2007. university-wide Writing Task Force was presented. Those results indicated that students would be better Murdick, W. The Portable Business Writer, served by removing the requirement for Composition Houghton-Mifflin, 1999. II and replacing it with a more business-oriented writing course. It was also recommended that
Dr. Nancy Coulmas is a professor of accounting at Bloomsburg University of Pennsylvania. Dr. Stephen Markell is an associate professor of management at Bloomsburg University of Pennsylvania. Dr. William Neese is a professor of marketing at bloomsburg University of Pennsylvania.
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Table 1: Paragraph Assessment Rubric College of Business Bloomsburg University
Assessment Level 1 Level 2 Level 3 Level 4 Criteria Unsatisfactory Basic Proficient Advanced ( 0 points) (2 points) (3 points) (4 points) Vocabulary & Contains multiple Contains no Uses appropriate Shows advanced Spelling made-up words, made-up words, vocabulary with skill; effectively incorrectly used few incorrectly no spelling errors chooses and uses 1._____ words, and/or spelling used words, words appropriately errors and/or few without spelling spelling errors errors. Sentence Poor sentence Writing is Shows skill Shows advanced Construction construction makes comprehensible constructing skill; conveys ideas writing difficult to but shows only comprehensible using complex 2. _____ understand basic sentence sentences w/sub- sentences. construction skill. ordinate clauses. Grammar & Multiple errors One or two errors Uses grammar Shows advanced Punctuation in grammar and in grammar and and punctuation skill; uses grammar 3. _____ punctuation punctuation without error. and punctuation without error. Clarity & Difficult to read and Conveys a basic Conveys a basic Shows advanced Readability understand what the point in an point with clarity. skill; clearly conveys 4. _____ author wants to unfocused ideas and provides convey. manner. relevant support. Organization & Does not present At least one idea At least one idea Shows advanced Idea and/or develop an is minimally is presented and skill; effectively Development idea. developed or developed by presents, organizes, 5. _____ related to another relating it to other and develops ideas. idea. ideas or material. Transition Lacks transition Contains at least Uses transition Shows advanced Sentences sentences linking one transition sentences skill; uses transition 6. _____ paragraphs. sentence linking effectively to link sentences very paragraphs. paragraphs. effectively to link paragraphs Audience Focus Unfocused; addresses Audience focus Shows clear, Clearly and 7. _____ wrong audience. shifts or is lost consistent consistently writes to audience focus the appropriate audience. Content Mastery Critical errors or Minor errors or No errors or No errors or 8.____ omissions in omissions in omissions in omissions in content or knowledge content or content or knowledge. Shows knowledge knowledge command of content Total 90%=25.2, A= 25 80%=22.4, B= 21 70%=19.6, C= 19 60%=16.8, D= 16 7 x 4=28 Student : ______Assessment Score: ______Course/Class Identifier: ______Assessor:_____
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COLLEGE TRUSTEE GOVERNANCE: AUGMENTING CARVER’S POLICY GOVERNANCE WITH ACCEPTED CONTROL AND PLANNING SYSTEMS Spring Walton, University of Maryland, University College Charles Walton, Gettysburg College
ABSTRACT Carver‘s Policy Governance is widely used in community colleges. The Carver model stresses that Boards of Trustees need to focus on development of policy and avoid supervision of administrative tasks. State law often reserves to the trustees specified operational decisions. Also, trustees are sensitive to media criticism of the lack of controls, with respect to fraud, misappropriation, contract abuses, and employment irregularities. This paper advocated the use of AICPA Quality Systems Auditing Techniques to prepare and monitor controls. An ISO 9000 like system of disclosures is advocated to meet control requirements, while remaining in the spirit of Carver. ______
INTRODUCTION Carver‘s thesis is that boards do not spend time on the really important matters of colleges and are too Carver's Policy Governance® Model is a widely involved in managing the administration. accepted model of not for profit board governance Carver(2001) wants boards to focus, almost entirely, and has been widely disseminated through the on developing of means and upon evaluation solely publications and meetings of the Association of of the accomplishment of means. Carver has found a Community College Trustees. Carver(2001) claims, receptive audience with college presidents, who ―The Policy Governance model developed by the desire less active trustee oversight of operations; author is the first universally applicable theory of trustees, who are not interested in the voluminous governance.‖ Carver‘s system advocates the detail of college operations; and trustees, who want separation of the trustee function and meetings from more accountability with evaluation based upon the administration function. Carver (2006) advocates objective criteria. that board of trustees function without much influence from the administration. Carver's Policy Governance® Model has problems from theoretical and practical systems views. This The Carver system depends upon primarily on two paper addresses problems and advocates a way that constructs: ends and means. Ends are the desired accepted management techniques can solve those outcomes of the college. They are the deliverables of deficiencies, while retaining the objectives of the college and are similar to the college‘s mission Carver‘s system. statement, goals and objectives. A major problem not adequately addressed by Carver Carver defines means as anything other than ends. In is community college boards are political appointees practicality, means are the methods the college uses subject to specific legal duties, which may not be to achieve the ends. Closely associated with means delegated. They are also under political pressures to are Presidential Limitations. Presidential Limitations safeguard the community college with respect to are the means proscribed by the board for use by the controls against fraud, misappropriation, contract college president. Carver (20006) recommends they abuses, and employment irregularities, as those are be stated as a negative: The president may not …..‖ the areas most often criticized in the media. In the Under Carver, except for Presidential Limitations, the climate of Sarbanes-Oxley, politically appointed president may administer the college in anyway that boards are sensitive to media and citizen charges that achieves the ends. criticize the Board of Trustees for a lack of controls.
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The governance of community colleges by lay boards (See the accompanying paper, A Case Study is difficult without a solid detailed conceptual Augmenting Carver’s Policy Governance with framework of educational administration and Accepted Control and Planning Systems in a experienced guidance in development of Carver ends Community College). and means statements. Carver‘s system encourages a focus on policy and the avoidance of compliance ISO 9000 is a compliance system that is often detail. Carver‘s system does not provide a balanced described as ‗do what you say, say what you do‘. A approach to control and supervision versus policy. major tenet of ISO 9000 is the client describes what Augmentation by a control system that meets the is necessary and the ISO 9000 supplier documents board‘s supervision of legally mandated and the steps used to comply. When the supplier varies strategically important items is needed. The control from the steps, a non-compliance report is made. ISO system advocated in this paper drew from principles 9000 is a disclosure based system. As such, ISO 9000 of ISO 9000‘s control system. provides a framework for community college trustees to meet their control and monitoring obligation and One control system methodology is the extension of remain with the spirit of Carver. an AICPA methodology developed with Alamo Systems presented ISO 9000 and Quality Systems The AICPA Seminar primarily rely upon a Auditing continuing education seminars in major US knowledgeable auditor interviewing the personnel cities. The documentation techniques and ISO 9000 responsible for a function and developing flowcharts principles taught offer a way for community college describing what the person does. The interviewee trustees to have developed a system of internal verifies the flowcharts immediately after the controls and an information system in place to meet interviewee. The flowcharts are compiled and trustees‘ responsibility for meeting their compared with other audit information for responsibilities for legally mandated duties and presentation to the trustees. A modified trustee controls on those areas which the trustees have governance system is developed. The documents determined are strategically important. A nationally required are listed in Figure 1. accepted AICPA methodology provides trustees The items audited are those functions legally reserved reliance upon control system developed and taught to the trustees and those functions the trustees through AICPA to CPAs. Reliance upon AICPA deemed strategic. Functions reserved to trustees in developed systems and CPA firm provides boards Maryland are listed in Figure 2. with due diligence by reliance on legally knowledgeable experts in financial controls, which Interim reports and reportable auditable conditions buffers criticism from the media. should be made to the board designed project officer and usually to the Audit Committee. Many community college boards have invested a significant amount of time and resources in adopting The complied reports of each function are used to Carver. For many it would be politically difficult to develop a draft for board consideration of the means abandon Carver. The controls present a methodology and presidential limitations, both of which are for the development of means that can be objectively documented as a part of Board Policies. verified in the spirit of Carver. The development of means and ends are consistent with control theory A committee of the board should review documents and sensitive to Deming‘s(2000) quality principles. and forward to the entire Board, significant Development of means is especially difficult for a lay conditions and move other to the consent agenda. board of trustees. Sometimes Board Policy requires that all documents required by Board Policy be maintained on a website In addition, the principles advocated have been that is open to the public. successfully implemented in a community college.
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The means limitations are submitted to the Board Miller, G. (1956). The Magical Number Seven, Plus Attorney for an opinion as to whether the Board‘s or Minus Two. The Psychological Review, vol. 63, Policies meet the legal requirements related to pp. 81-97 functions reserved to the Board and adequate control of those functions by the Board. Alamo Systems (1997). ISO 9004-2:1991(E) and AICPA Internal Control, Many of the management Ends developed with Carver tended to be too global control features and disclosure requirements were and not quantifiable. Under Carver, the Board‘s work adapted from ISO 9000 methodology, Documents is to continually develop Ends, so a ‗first cut‘ Ends provided in ISO 9000 Consulting and Internal methodology was developed. The development of Quality Auditing , Alamo Systems. first Ends were a function of Deming (2000) definition of quality as meeting stakeholder needs Senge, P. (1990). The Fifth Discipline. Doubleday, and Miller‘s (1956) the limitation that the number of 1990. Ends should be Seven plus or minus two.. Sterman, J. (2000). Business Dynamics: Systems Recommended stakeholders on the accompanying Thinking and Modeling for a Complex World. Irwin case study were students, employees, County McGraw Hill, 2000. Commission, Economic Development Commission, Walton, S. and Walton, C. (in press). A Case Study Arts Council, Special Education Council, Chamber of Augmenting Carver‘s Policy Governance with Commerce, Labor Unions, Aging Council and Accepted Control and Planning Systems in a Historical Society. Community College, NABET 2007. A positive gain is that trustees usually gain Figure 1: Board Governance System Documents significant knowledge about their college. Also, trustees were more comfortable that adequate By-Laws controls were in place and that should something Legislative Authority for Board Action occur, they had performed due diligence with respect Legal Restrictions Placed Upon Board Action to controls. Legal Mandates Placed Upon the Board REFERENCES Board‘s Internal Operating Policies Officers of the Board Carver, J. (2001). "A Theory of Corporate Legal Counsel, Independent Auditor, and Consultants Governance: Finding a New Balance for Boards and Their CEOs" by Corporate Board Member. Adopted Board Governance System Board Of Trustee Policy Carver, J. (2006). Boards That Make a Difference: A Board of Trustee Authorization of Administrative New Design for Leadership in Nonprofit and Public Actions to Be Taken in Order to Meet the Mission of Organizations. Jossey-Bass, 3rd edition. the Community College Carver, J, and Carter, M. A. (1994). New Vision for Procedures Board Leadership: Governing the Community Flowcharts of processes that define WHAT is done to College. Washington: Association of Community achieve Policy requirements College Trustees. Instructions Deming, E. (2000). The New Economics for Documents that describe HOW processes are Industry, Government, Education. The MIT Press; performed 2nd edition. Records Forms, Reports, or Data that demonstrate compliance to Governance Requirements
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Figure 2
Functions Reserved to the Trustees (Maryland)
Adoption of the budget
Authority to borrow, to acquire personal property
Acquisition of property
Award of bids of $25,000
Disposition of property
Procurement by competitive sealed proposals
Charging of student fees
Sole source procurement
Entering of agreements
Staffing and Salary
Charles Walton is an Associate Professor of Management at Gettysburg College.
Spring Walton is a member of the University College of the University of Maryland.
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EVALUATING THE IMPACT OF INTEGRATED BUSINESS CURRICULA ON STUDENT OUTCOMES: IMPLICATIONS OF CURRICULUM TRANSFORMATION TO MAKE STUDENTS MORE MARKETABLE John Buttermore, Slippery Rock University
ABSTRACT
There is a growing body of literature in business education that reports a significant disconnect between the traditional undergraduate business school curriculum found in most institutions today, and the needs of the modern business community, in terms of graduate preparedness. Many undergraduate business school curricula are organized by functions such as finance or marketing that mirror the departments historically found in commercial organizations. However, this traditional curricular model doesn‘t recognize the many fundamental changes in either the emerging, cross-functional structure of business, or employers‘ expanded expectations of employees‘ roles. So many business graduates are not well prepared for today‘s multi-faceted entry-level jobs. A growing number of AACSB-accredited business school programs have made dramatic integrative changes in their curricula to address this issue. This research will explore the process of change at several of these schools, including the University of Idaho, which implemented an integrated business curriculum in their undergraduate school more than ten years ago. Other schools include Kent State University, and Oklahoma University. This paper will explore these transformational programs.
INTRODUCTION donation from Joseph Wharton, who was a manufacturer of armor plate for the U. S. Navy The functional structure of curricula found at many (Pierson, 1959). In addition to the basic courses of undergraduate business schools is largely unchanged history, economics, and government, the new over the past 50 years. The approach is traditional, business school offered a specific set of courses in with students declaring a major as early as their accounting, business organization, and commercial freshman year, and pursuing a course in one of six to law (Pierson, 1959). Over the next fifty years, eight different and distinct areas of study, depending business as a separate academic discipline grew on on the school. There is little if any cross-functional public and private campuses across America, in coursework between majors, except for a subscribed response to the increasing demands of business for ‗core‘ of survey courses in each subject area that are trained graduates. Courses were developed based on designed to represent a common body of knowledge the needs of business, and schools struggled to find (CBK), and a ‗capstone‘ policy or strategy course and develop faculty and texts to teach these new that‘s intended to bring everything together for subjects. By the start of World War II, there were graduating seniors. more than 120 collegiate schools of business in the U.S. awarding 10% of all baccalaureate degrees, up Historically, business schools have designed from 3% in 1920 (Gordon & Howell, 1959). Most of curricula to meet the needs of the marketplace. The theses schools followed curricular recommendations earliest example of a specific undergraduate business as specified by the AACSB, the Association to curriculum appeared in Philadelphia in 1881 when Advance Collegiate Schools of Business, (formerly the University of Pennsylvania established the the American Academy of Collegiate Schools of Wharton School of Business with a $100,000 Business), the primary business school accrediting
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agency, which at the time dictated a set of required THE SITUATION TODAY courses, including accounting, business law, finance, statistics, and marketing (Pierson, 1959). This These fundamental changes in US business have fundamental group of courses, usually known as the roots in a global focus on efficiency. Economists‘ business core, continues at many business schools theory of comparative advantage is alive and well in today. commerce today, spurred on by the many changes that have occurred in trade laws over the past quarter This traditional structure may well have served the century. These changes have literally created global business community of the mid 20th century, when competition in many sectors, forcing most businesses many entry-level jobs were in large companies in to focus on cost control to maintain profitability. This manufacturing industries. These enterprises enjoyed in turn has led to off shoring and outsourcing in many stable pricing, moderate growth, robust staffing, and segments as companies struggle to push their costs protection from foreign markets. But in the past half- and prices lower, to meet the demands of our century, sweeping changes have dramatically altered increasingly competitive economy (Fishman, 2003). the organization, structure, size, and survivability of US businesses. Free trade laws have opened the globe Business people work in process-centered to American companies, but they‘ve also opened our organizations today, as opposed to discrete functional economy to increasingly strong competition from departments. Businesses are concerned not with the many developing countries, materially changing the finance department, but with the acquisition and business environment. Technology has boosted dispersal of capital resources. They don‘t focus on productivity, improved connectivity, and in the the marketing group; they have a process, eliminated many positions from every firm sales/collection/customer service process (Walker & (Friedman, 2006, Jones, 2002). Retailers, who Black, 2000). traditionally followed manufacturer‘s suggested retail These changes have not gone un-noticed in academia. prices (and their margins), broke ranks with their As early as 1988, Porter and McKibbin, in a study suppliers in favor of building sales and customer commissioned by the AACSB, entitled ―Management loyalty through everyday lower prices, vis a vis Wal- Education and Development: Drift or Thrust into the Mart (Fishman, 2003). 21st Century‖, pointed out a general criticism of The growth of small business in the U.S. has also undergraduate business school curricula which placed been remarkable. Today, over 50% of all people ―insufficient emphasis on integration across employed in the U.S. are employed in organizations functional areas‖ (pg 65). AACSB-accredited with less than either 500 employees or $6 Million in schools currently use a number of different curricular annual revenue, depending on the industry. Small models, ranging from traditional offerings, with a businesses represent over 99% of all employer firms. basic set of discrete core courses (CBK), followed by They have generated 60 to 80 percent of net new jobs a major course of study, to fully integrated business annually over the last decade, and create more than curricula with cohorts, and cross functional team- half of non-farm private gross domestic product teaching. The AACSB no longer dictates a specific (SBA, 2006). Small businesses often expect more curricular formula, but rather suggests topics versatility and functionality from employees. Service normally found in general management degree industries have supplanted manufacturing firms, and programs (AACSB 2006, pg 70). one of the biggest trends across all industries is There is evidence that many business and consolidation. Companies buy each other because professional schools recognize the growing gap they can‘t grow from the inside. Today, companies between student outcomes and employer needs. routinely enter new product markets and geographies Methods to integrate curriculum such as team through acquisition rather than organic expansion. teaching, business simulation, and interdisciplinary courses have been identified as helpful in making
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business classes more useful (Cannon et al, 2004; IBC include marketing, finance, operations Cook, 1993; Felder, Felder, and Dietz, 1998; management, human resources, and business strategy Nicholson, Barnett, and Dascher, 2004). A smaller (Reyes, 2007. number of schools have actually achieved a breakthrough in transforming curricula to reflect the The IBC teaching team meets weekly to lay out the new business model (Cohen, 2003; Frank, 2006; class schedules. All examinations are either oral or Pharr, 2000; Putchinski, 1998). essay. The concept requires a significant time commitment on the part of faculty, and in fact, during Some of the schools that have made significant the search process, University of Idaho search teams curricular modifications in their undergraduate look for candidates who have the background, business programs are The University of Idaho, capability, and desire to participate in the IBC. One Babson College, and Oklahoma University at of the tenets of the Idaho IBC is the use of a Norman. These new curricular models typically focus partnering outside corporation, such as Harrah‘s, or on cross functional, collaborative, or team teaching of Potlatch, which commits resources and access to the business subjects like marketing, finance, human students of the cohort throughout the semester. There resources, and management. They also tend to form are many anecdotal examples of improved student classes into cohorts, or groups of students, who outcomes, including employer and alumni matriculate together for some part of their schooling. testimonials, and the school is committed to this primary curricular change (Reyes, 2007). UNIVERSITY OF IDAHO KENT STATE UNIVERSITY For example, according to Dr. Mario Reyes, Asst. Chair of the School of Business, at the University of An integrated curriculum has been introduced at the Idaho, that school uses centralized advising for department level in the marketing discipline at Kent freshmen and sophomores to insure that liberal arts State‘s Business School in Kent, Ohio. This change, requirements are completed before a student reaches while not across all business subjects, was made the business program as a junior. Then, students are specifically to improve student outcomes in terms of formed into cohorts to begin a two-semester, 17 employability. Dr. Richard Kolbe, chair of the credit-hour course, called Integrated Business Marketing department at Kent State‘s School of Curriculum (IBC). The first semester consists of 9 Business, says the goal of the change was to create hours of IBC class work, one three-hour course in marketing graduates who could make an easier IBC Accounting, and an Economics course (Mario transition from college to the business world, where Reyes, personal interview, August 20, 2007). The the need was for entry level employees who could second semester of the junior year, students remain immediately contribute to an organization‘s success together in their cohort for an 8-hour IBC class, plus (Dr Richard Kolbe, personal interview, June 2007). one more three-hour IBC Accounting class, and they‘re also encouraged to choose two courses from The focus of the change is the creation of marketing their major field of study to complete the semester. cohorts that follow a specific curriculum for their last Entering their senior year, students are free to two years at Kent State. The program is designed to concentrate on the balance of their major field give all students the same basic understanding of (Reyes, 2007). business, and then build on each module so students link classes and subjects throughout their major The IBC course is a team-taught, fully integrated studies. One of the key elements is a business half-day class that meets three times per week for internship. Kent State has partnered with businesses both semesters of the student‘s junior year. It is also throughout the Akron, Ohio metropolitan area to give the first exposure students have to business courses, students hands-on internship experiences that are except for basic pre-requisites such as computer analytical in nature, with an emphasis on developing skills, public speaking, and math. Subjects covered in problem-solving skills while earning course credit.
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While Dr. Kolbe is hopeful that the entire School of a sense of urgency for change. According to Cohen, Business can achieve an integrated curriculum, the costs of change at Babson College included a they‘ve begun the change at the department level as a dramatic increase in intensity and pace of faculty life, model. Some of the professional skills subjects that and an increased fear of job security among faculty receive added emphasis in the new marketing (Pg 175). curriculum are entrepreneurship, team dynamics, business writing, and communications skills (Kolbe, There‘s indeed a sense in the business schools on 2007). some college campuses today that the traditional curriculum currently in use is out of step with the OKLAHOMA UNIVERSITY modern business organization. A gap continues to grow between business practice and the knowledge The Michael F. Price College of Business at OU, being delivered by academia (AACSB, 1996). Some Norman developed an integration model in their more schools have found a way to overcome significant than twelve years ago that has student-created and hurdles to curricular change and model the integrated student-run businesses built into the two-semester, business curriculum. There seem to be many business junior-year IBC program as a practicum. According schools that either don‘t recognize the need for to materials received from Shelly Grunsted, Director change, or haven‘t been able to make it happen. of the IBC program, students are formed into ‗companies‘ of approximately 20 students. These Today‘s graduate is competing for employment on a companies elect their own officers and board of global scale, whether she realizes it or not. Schools directors, develop and manufacture products or that‘ve made the change to an integrated curriculum provide services, and contribute all their profits to a are convinced by their own anecdotal evidence that pre-selected charity in the Norman area. In addition their students are better prepared to compete in this to this contribution, students volunteer their time in new business paradigm. support of the charity during the semester. They are required to finance their business through a loan from REFERENCES a local bank and in fifteen weeks, completely Association to Advance Collegiate Schools of servicing this obligation, including interest. Many of Business. (2006). Eligibility procedures and the classes in the practicum focus on specific aspects accreditation standards for business accreditation. of the day-to-day operations of these companies. Tampa, FL. CONCLUSION Association to Advance Collegiate Schools of Many stakeholders, including faculty, administration, Business. (1996). A report of the aacsb faculty and students, need to be convinced that change is leadership task force. Presented to the AACSB Board needed. As Alan Cohen, writing about the curricular of Directors, March. Tampa, FL. transformation at Babson College puts it, ―Change in Cannon, D.M, Klein, H.A., Koste, L.L., & Magal, academia is hard; too many stakeholders can block S.R. (2004). Curriculum integration using enterprise change and almost no one … can legitimately drive resource planning: An integrative case approach. it‖ (Pg 160). Faculty tends to be either change agents, Journal of Education for Business, Nov, pp 93-101. or strong resistors of change. Curricular compartmentalization, as found on most campuses Cook, Curtis W. (1993). Curriculum change: Bold today, allows for maximum faculty autonomy, and thrusts or timid extensions. Journal of Organizational sustained specialization. Those programs that have Change Management, Vol. 6, No. 1, pp. 28-40. instituted a significant business school curricular change have started with an evaluation of outcomes, Cohen, A.R., (2003). Transformational change at including employers‘ needs and expectations, and babson college: Notes from the firing line. Academy these employer surveys have been the key to creating
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of Management Learning and Education, Vol 2(2). Pharr, S. W. (2000). Foundational considerations for Pp 165-180. establishing an integrated business common core curriculum. Journal of Education for Business. Sept- Felder, R.M., Felder, G.N., & Dietz, E.J. (1998). A Oct, Vol. 76, Issue 1, pp. 20-23. longitudinal study of engineering student performance and retention v. comparisons with Pierson, F. C. (1959). The education of American traditionally taught students. Journal of Engineering businessmen. New York. McGraw-Hill. Education, 87(4), pp. 469-480. Porter, L. W., & McKibbin, L. E. (1988). Frank, Howard. (2006). The BBA-resized. BizEd, Nov/Dec. pp. 34-36. Management education and development: Drift or thrust into the 21st century. New York. McGraw-Hill. Fishman, Charles. (2003). The wal-mart you don‘t know. Fast Company, 77, December, pp. 68-78. Putchinski, L.B. (1998). Case study of curriculum change in a college of business administration. Friedman, T.J. (2006). The world is flat. New York: Dissertation accepted at the University of Central Farrar, Straus & Giroux Florida, Orlando. Pp 13-53.
Gordon, R. A., & Howell, J. E. (1959). Higher Small Business Administration, (2007). SBA Office education for business. New York. Columbia Univ. of Advocacy; Frequently asked Questions. Retrieved Press. April 25, 2007, from sba.gov Web site: http://app1.sba.gov/faqs/faqIndexAll.cfm?areaid=24 Jones, E.A. (2002). Transforming the curriculum: Preparing students for a changing world. ASHE-ERIC U.S. Department of Education, (2006). A test of Higher Education Report: Volume 29, No. 3, pp 1-14. leadership: Charting the future of U.S. higher education. Washington, D.C. Nicholson, C.Y., Barnett, S.T., & Dascher, P.E. (2005). Curriculum assessment in marketing Walker, K., & Black, E. (2000). Reengineering the programs: Current status and examination of AACSB undergraduate business core curriculum: Aligning core standards at the program level. Marketing business schools with business for improved Education Review, summer, Vol 15, Issue 2, pp.13- performance. Business Process Management Journal, 26. 6(3), 194.
John Buttermore is a professor of marketing at Slippery Rock University.
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AN ATTITUDINAL SURVEY OF CLASSROOM RESPONSE SYSTEMS Eric L. Blazer, Millersville University
ABSTRACT
Classroom response systems (CRS) are interactive technologies that enable teachers to streamline administrative tasks, conduct real time assessments, and initiate conversations with students. This paper describes the basics components of a classroom response system and its impact on student learning and classroom pedagogy. Survey results from a Fundamentals of Real Estate class provide evidence that classroom response systems are an effective means of engaging students and assessing performance, but more research is needed to evaluate the impact of CRS on student learning and classroom pedagogy.
INTRODUCTION gather real-time data on student beliefs, attitudes, and understanding. This synchronous mode requires The barriers to adopting classroom response systems greater flexibility, responsiveness and creativity on continue to fall, as vendors develop affordable easy the part of faculty. To realize the full benefits of a to use products (Beatty, 2004). Classrooms are CRS faculty must allow students to shape classroom increasing equipped with the basic technology discussions and be willing to adapt lesson plans on required to incorporate classroom response systems, the fly in response to student feedback (Birdsall, and most faculty are familiar with the basic 2002). technology. Perhaps the biggest barriers to the wide- spread successful adoption of classroom response Beatty (2004) offers insights gained from CRS systems may be that faculty must learn new teaching and mentoring. Classroom response systems classroom skills and adjust their teaching methods, should be used for more than administering endless and students must adapt to active learning (Johnson, series of quizzes. They offer a means to more fully 2004) engage students both inside and outside of the classroom. Brief quizzes at the start of class can Classroom response systems (CRS) are interactive allow faculty to push descriptive material out of the technologies that enable teachers to streamline classroom and encourage students to come to class administrative tasks, conduct real time assessments, better prepared. CRS-based pedagogy leaves more and initiate conversations with their students. While class time for exploring core concepts and developing the ability to quickly and easily take attendance and deeper levels of understanding. This transition grade quizzes might be an initial draw, the greater however requires a shift in the focus of classroom benefits from CRS come in the form of their capacity planning from lecture note presentation to CRS to allow faculty to see students think (Johnson, question design. Beatty argues that apart from brief 2004). Classroom response systems engage students content based assessments; effective CRS questions in active learning. They upend traditional should be limited to those that have clearly asynchronous teaching models in which information identifiable pedagogical goals such as: flows in a single direction from faculty to students, and feedback is obtained via exams, quizzes, and Making students aware of their own and homework assignments. Classroom response other‘s perceptions systems replace the controlled lecture environment Discovering points of confusion or with a synchronous classroom model in which faculty misconception
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Distinguishing between related concepts Most vendors offer both student and institutional Realizing parallels or connections between pricing plans. The pricing of institutional packages different ideas varies widely, and usually involve the purchase of Elaborating on the understanding of a software, receiver units, and student response pads. concept Student packages typically involve the purchase of a Exploring the implications of an idea in a response pad for as little as $5 and the payment of a new or extended context registration fee. Student packages can often be bundled with a textbook. Vendors typically provide Shifting from simple computational or fact based software and receiver units free of charge to adopting questions to ones that require deeper understanding faculty. The CRS used in this study was a RF system also often requires adjustments on the part of developed by eInstruction. The RF response pads students. Students may perceive questions that cost students $25 and required the payment of a $15 involve ambiguities as being unfair or trick questions. registration fee. Thus it is important to communicate with students the purpose of the questions (learning), and to balance THE STUDY correct answers with participation when evaluating This study was conducted in a Fundamental of Real CRS results. Estate course, an upper level finance elective. The TYPES OF CLASSROOM initial course enrollment was 23 students, 3 students RESPONSE SYSTEMS withdrew form the class, and 18 students completed the CRS survey. A summary of the survey results The two most common types of CRS systems are appears in Table-1. Students were required to infrared systems (IR) and radio frequency (RF) purchase and register their CRS pads by the second systems. The typical components of classroom week of a class. They were provided a handout with response system include: step-by-step instructions on how to register their pads. The handout included screen shots of Response pads – one per student eInstruction‘s registration web pages and detailed A faculty receiver unit instructions on how to complete the registration A faculty computer with server software process. Only one of 23 students had questions about A projection system or TV the registration process. The CRS was used to gage classroom participation and administer homework The receiver unit is connected to the faculty based quizzes. Graded homework assignments and computer via a USB port, and questions are tabulated quizzes accounted for 15% of the student‘s final and results are projected on a screen or TV. While the grade. During the semester 11 homework features of CRS vary by vendor, most popular models assignments were collected, and students were given can be integrated with WebCT or Blackboard, and five unannounced ―homework‖ quizzes. These CRS allow faculty to use the CRS within existing quiz scores accounted for 32% of the student‘s final PowerPoint presentations. The infrared systems (IR) homework grade. The 10% classroom participation are typically the cheaper of the two systems, but are grade was based on CRS tracked attendance and designed for smaller classrooms, as they require a performance on ―lecture‖ quizzes. Lecture quizzes clear line of site between student response pads and were administered in PowerPoint presentations. They the IR receiver units. RF systems overcome line of consisted of numerical and content based questions, site limitations by transmitting student responses via as well as deeper-level context based questions. radio waves, and are effective in large classroom Attendance accounted for 25% of the participation settings. Depending on vendor specifications, a single grade, and performance on ―lecture‖ quizzes RF receiver can accommodate up to 1,000 response accounted for the remaining 75%. pads.
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THE SURVEY participation. On-the-other-hand, the CRS had little impact on effort outside of the classroom. Sixty- A twenty-five question Likert scale survey was seven percent of the students reported no change in administered on the last day of class to 18 students. how they prepared outside of class, and only 22% The five categories used to measure student attitudes agreed with the statement that CRS motivated them were (1) Strongly Agree (2) Agree (3) Neutral (4) to keep current with readings and homework. These Disagree (5) Strongly Disagree (see Table-1). results may have been due to the fact that homework Ironically, to save time, the survey was administered assignments were collected on a regular basis (see using scantron forms rather than the CRS. To identify Table-5). potential spurious positive responses and to strengthen the results, the survey included five CLASSROOM ATTENDANCE reverse directional duplicate questions. The five paired questions concerned ease of use, classroom CRS vendors claim their systems improve classroom attendance, classroom participation, motivation attendance, but the survey results in this study do not outside of class, and overall effectiveness. The support this claim. Only 44% of surveyed students question pairs and correlation results appear in Table- agreed with the statement that CRS improved their 2. The correlations between the paired questions were classroom attendance. This likely due to the small negative and ranged from -.40 to -.48; this suggests class size, as Edmonds (2006) provides evidence that the impact due spurious responses is minimal. a CRS may improve attendance in large lecture hall settings. Attendance was taken at the start of each A frequency table of student responses appears in class with the CRS, but only 22% of the surveyed Table-3. For the purpose of describing survey data in students felt that CRS motivated them to be on time the sections that follow student responses have been (see Table-6). Interestingly 61% of surveyed students combined into three groups: agree, neutral, or agreed with the statement that CRS is an appropriate disagree. way to assess classroom participation.
EASE OF USE STUDENT SATISFACTION
CRS vendors claim that their systems are easy to use. Overall measures of student satisfaction are mixed. The survey results and student experience support While 61% of surveyed students agreed with the this claim. Only one of 23 students experienced statements that CRS was fun to use and 67% would difficulties in registering their eInstruction CRS pad, recommend the continued use of a CRS in this and during the semester one response pad failed, but course, other measures of student satisfaction were was promptly replaced. Seventy-eight percent of the mixed (see Table-7). Fifty-six percent of surveyed students agreed with the statement that CRS was easy students agreed with the statement that CRS to use and no students disagreed with the statement improved their learning experience, but only 44% felt (see Table-3). that CRS added value to their learning experience, and only 33% agreed with the statement that CRS ClASSROOM PERFORMANCE was worth the cost. At the same time only 6% of surveyed students felt CRS was a waste of time and CRS vendors claim their technology improves only 28% would rather not use CRS in other courses. classroom performance. Although this study does not These findings are consistent with finding by Everett evaluate direct measures of classroom performance, it (1998) in large section micro-economics classes and provides indirect evidence to support vendor claims. Edmonds (2006) in large section managerial Survey results found more than 60% of students accounting classes. agreeing with the statements that the CRS added value to their learning experience, encouraged them to pay attention, and increased classroom
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CONCLUSIONS AND FUTURE RESEARCH Edmonds, T. P., Edmonds C. D., and Edmonds C. T. (August 2006) Student Perspectives on the Students in a Fundamental of Real Estate class had Effectiveness of Student Response System little difficulty mastering CRS technology, and had Technology. Working Paper. an overall positive response to the use of a CRS. Survey results suggest a positive impact on student Edmonds,V. Turning Point Student Response attendance, classroom performance, and overall System,‖ Campus Technology, http://campus- student satisfaction. Survey results provide evidence technology.com/print.asp?id=9864. that classroom response systems are an effective means of engaging students and assessing Everett, M., and Ranker, R. (2002) Classroom performance, but more research is needed to evaluate Response System: An Evaluation at an Easy-Access the impact of CRS on student learning and classroom Regional University. http://www.einstruction.com /News/ index.cfm?fuseaction= news.display&Menu pedagogy. Future research should attempt to compare =newsroom&content=FormalPaper&id=125 direct measures of student learning in traditional and CRS classrooms, to assess the impact of CRS on Everrret, M., and Zinser, O., (1998) Interdisciplinary classroom pedagogy, and evaluate instructor Social Sciences Courses: Using a Critical Thinking perceptions of classroom response systems. Approach. Journal of General Education, Vol. 4, No. 3.
REFERENCES Johnson, D. and McLeod, S. (2004) Using Student Response Systems to See Student Thinking. Learning Abrahamson, L. An Overview of Teaching and and Leading with Technology, Volume 32, No. 4, 18- Learning Research with Classroom Communication 13. Systems. Better Education Inc., http://bedu.com/Publicatons/Samos.html. Lowery, R. (March 2005) Teaching and Learning with Interactive Student Response Systems: A Beatty, I. (2004). Transforming Student Learning with Classroom Communication Systems. Educase Comparison of Commercial Products in the Higher- Center for Applied Research. Research Bulletin, Education Market,‖ A working paper presented at the Issue 3. Southwestern Social Sciences Association,
Birdsall, S. (September 2002) Assessment and http://people.uncw.edu/lowery/SWSSA%20ms.pdf. Student Response Systems. The Teaching Exchange.
Eric L. Blazer, CPA, is an Associate professor of finance and accounting at Millersville University of Pennsylvania. He received a PhD in Finance and a Masters in Accounting from Virginia Tech. His research interests are in the fields of corporate finance, distance education, and educational pedagogy.
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Table 1 Student Survey Questions SA A N D SD 1 The CRS system was fun to use 1 2 3 4 5 2 CRS did not change how I prepared for class 1 2 3 4 5 3 CRS added value to my learning experience. 1 2 3 4 5 4 CRS slowed down class too much. 1 2 3 4 5 5 CRS improved my class attendance. 1 2 3 4 5 6 CRS responds pads were difficult to use. 1 2 3 4 5 7 CRS motivated me to be on time. 1 2 3 4 5 8 CRS encouraged me to pay attention. 1 2 3 4 5 9 CRS increased my class participation. 1 2 3 4 5 10 CRS is an appropriate way to assess classroom participation. 1 2 3 4 5 11 CRS is a good way to take classroom quizzes. 1 2 3 4 5 12 CRS did not affect my classroom attendance. 1 2 3 4 5 13 CRS helped me compare my performance with other students in the 1 2 3 4 5 class. 14 CRS improved my learning experience. 1 2 3 4 5 15 CRS was a waste of time. 1 2 3 4 5 16 CRS was straight forward and easy to use. 1 2 3 4 5 17 The anonymity provided by CRS encouraged participation. 1 2 3 4 5 18 CRS motivated me to keep current with readings and homework. 1 2 3 4 5 19 CRS motivated me to exchange ideas with my classmates. 1 2 3 4 5 20 CRS did not effect my class participation. 1 2 3 4 5 21 Based on my experience, I would recommend the continued use of CRS 1 2 3 4 5 in this course. 22 I made use of the eInstruction (CRS) website to check my grades and 1 2 3 4 5 performance. 23 Based on my overall experience CRS is worth the costs. 1 2 3 4 5 24 I would like my Professors to make use of CRS in other courses. 1 2 3 4 5 25 CRS should be an optional component of the course. 1 2 3 4 5
Table 2 Reverse Directional Question Correlations Questions Correlations 6,16 CRS responds pads were difficult to use. -0.40054 CRS was straight forward and easy to use. 5,12 CRS improved my class attendance. -0.44384 CRS did not affect my classroom attendance. 9,20 CRS increased my class participation. -0.44278 CRS did not effect my class participation. 14,15 CRS improved my learning experience. -0.47618 CRS was a waste of time. 2,18 CRS did not change how I prepared for class -0.48037 CRS motivated me to keep current with readings and homework.
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Table 3 Frequency Table Questions SA A N D SD 1 The CRS system was fun to use 5 6 4 1 2 2 CRS did not change how I prepared for class 5 7 6 0 0 3 CRS added value to my learning experience. 0 8 9 1 0 4 CRS slowed down class too much. 0 5 6 6 1 5 CRS improved my class attendance. 3 5 5 4 1 6 CRS responds pads were difficult to use. 0 1 4 9 4 7 CRS motivated me to be on time. 2 2 6 8 0 8 CRS encouraged me to pay attention. 3 9 6 0 0 9 CRS increased my class participation. 5 6 5 2 0 10 CRS is an appropriate way to assess classroom participation. 2 9 4 2 1 11 CRS is a good way to take classroom quizzes. 6 5 2 2 3 12 CRS did not affect my classroom attendance. 5 6 3 3 1 13 CRS helped me compare my performance with other students in the 3 8 5 1 1 class. 14 CRS improved my learning experience. 3 7 4 3 1 15 CRS was a waste of time. 0 1 7 9 1 16 CRS was straight forward and easy to use. 5 9 4 0 0 17 The anonymity provided by CRS encouraged participation. 6 7 3 1 1 18 CRS motivated me to keep current with readings and homework. 0 4 4 8 2 19 CRS motivated me to exchange ideas with my classmates. 2 5 2 9 0 20 CRS did not effect my class participation. 0 6 3 7 2 21 Based on my experience, I would recommend the continued use of CRS 1 11 3 0 3 in this course. 22 I made use of the eInstruction (CRS) website to check my grades and 0 1 3 6 8 performance. 23 Based on my overall experience CRS is worth the costs. 1 5 7 5 0 24 I would like my Professors to make use of CRS in other courses. 2 5 6 3 2 25 CRS should be an optional component of the course. 3 6 4 5 0
Table 4 Ease of Use Questions A N D Mean Median Std.Dev
6 CRS responds pads were difficult to use. 6% 22% 72% 3.89 4.00 0.83
16 CRS was straight forward and easy to use. 78% 22% 0% 1.94 2.00 0.73
A – Responses: strongly agree and agree
N – Neutral
D – Responses: strongly disagree and disagree
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Table 5 Classroom Performance
Questions A N D Mean Median Std.Dev
2 CRS did not change how I prepared for class 67% 33% 0% 2.06 2.00 0.80 3 CRS added value to my learning experience. 44% 50% 6% 2.61 3.00 0.61 8 CRS encouraged me to pay attention. 67% 33% 0% 2.17 2.00 0.71 9 CRS increased my class participation. 61% 28% 11% 2.22 2.00 1.00 14 CRS improved my learning experience. 56% 22% 22% 2.56 2.00 1.15 15 CRS was a waste of time. 6% 39% 56% 3.56 4.00 0.70 17 The anonymity provided by CRS encouraged participation. 72% 17% 11% 2.11 2.00 1.13 18 CRS motivated me to keep current with readings and homework. 22% 22% 56% 3.44 4.00 0.98 19 CRS motivated me to exchange ideas with my classmates. 39% 11% 50% 3.00 3.50 1.14 20 CRS did not effect my class participation. 33% 17% 50% 3.28 3.50 1.07
Table 6 Classroom Attendance Questions A N D Mean Median Std.Dev 5 CRS improved my class attendance. 44% 28% 28% 2.72 3.00 1.18 12 CRS did not affect my classroom attendance. 61% 17% 22% 2.39 2.00 1.24 7 CRS motivated me to be on time. 22% 33% 44% 3.11 3.00 1.02 10 CRS is an appropriate way to assess classroom participation. 61% 22% 17% 2.50 2.00 1.04
Table 7 Student Satisfaction Questions A N D Mean Median StdDev
1 The CRS system was fun to use 61% 22% 17% 2.39 2.00 1.29 3 CRS added value to my learning experience. 44% 50% 6% 2.61 3.00 0.61 14 CRS improved my learning experience. 56% 22% 22% 2.56 2.00 1.15 15 CRS was a waste of time. 6% 39% 56% 3.56 4.00 0.70 21 Based on my experience, I would recommend the continued use of CRS in this course. 67% 17% 17% 2.61 2.00 1.20 23 Based on my overall experience CRS is worth the costs. 33% 39% 28% 2.89 3.00 0.90 24 I would like my Professors to make use of CRS in other courses. 39% 33% 28% 2.89 3.00 1.18 25 CRS should be an optional component of the course. 50% 22% 28% 2.61 2.50 1.09 A – Responses: strongly agree and agree N – Neutral D – Responses: strongly disagree and disagree
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WILIFE -- ITS NEW INDOOR SURVEILLANCE CAMERA AND ITS CONTRACT MANUFACTURERS IN CHINA Al Mudrow, WiLife, Inc. Draper, Utah Gabriel Jaskolka, Tiffin Unversity, Tiffin, Ohio
ABSTRACT This case, written as a travelogue, summarizes the first author‘s activities and observations in an inspection trip he made to his firm‘s Chinese contract manufacturer, KYE. Besides showing interesting aspects of the Chinese manufacturing economy, the case is notable for portraying the relative proficiency of Chinese manufacturers in assembling complex electronic products.
I [Mudrow] work for a US firm, WiLife manages a plant in Dongguan but uses native workers [www.WiLife.com] which designs and sells a line of who are supervised by Taiwanese managers. The home and business surveillance cameras which resident plant manager, Summer, is Taiwanese as are connect to a PC. This case is an account of a trip several other project managers under him. Before I John, WiLife‘s Vice President of Manufacturing, and left for China I emailed KYE various production files I made to Dongguan, China, in late 2006 to evaluate and instructions for manufacturing tests. A barrage of the readiness of our contract manufacturer, KYE, to emails about these files followed. Overall, in this trip start production of our new outdoor camera. This is I wanted to see how KYE sourced the components one of nine trips to China I‘ve made in the last year. and to evaluate their readiness for producing the camera. While at KYE we also wanted to visit other current or prospective suppliers and contract manufacturers. Al’s tip We also wanted to talk to the current manufacturer of our indoor camera about some unresolved quality The best starting point for finding a Chinese supplier problems. is by asking your existing contacts. For example, Radio Shack, one of WiLife‘s customers, gave us a Background list of contract manufacturers they‘ve had good relations with. Suppliers of suppliers can also provide WiLife successfully introduced its first product, an contacts. And don‘t overlook non-obvious sources: A indoor surveillance camera, in November 2005 after neighbor whose firm buys sports drink bottles from nearly a year of development. This system allows the China asked me to suggest additional suppliers. Also, owner to quickly set up a surveillance camera in their if you‘re on a plane to China talk to the person sitting house or garage by networking it through the house‘s next to you. Internet search is less preferable: power lines. I installed such a camera in my home Alibaba, Global Sources, and China Sources can be garage. starting points but make sure you make a personal visit. Our original manufacturing strategy for the indoor camera was to produce it in the U.S. until there was Friday: We leave from Los Angeles enough demand to allow us to offshore the manufacturing. However, when we got price quotes Our flight leaves LAX airport at 11:20 pm on China from several Chinese manufacturers we saw that we Southern, a mainland Chinese carrier which has could offshore production even at modest levels of recently started direct flights from Los Angeles to two or three thousand units a month. So we Guangzhou, China. The KYE factory is in Dongguan, contracted with KYE, a Taiwanese firm, which about an hour away by car from Guangzhou. In the
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past we had to fly first to Hong Kong, spend the night part of the building non-Taiwanese Chinese can‘t there, then take a bus or ferry to China. This was enter. painful because the border formalities between Hong Kong and China were very time consuming and During lunch John and I note that WiLife has worked could take up to two hours. with five different Taiwanese project managers at KYE in Dongguan. They tell us that most of them This is the worst leg of the trip; it can take up to 15 have ―graduated‖ to Taiwanese system companies. hours because we‘re going against the jet stream. Most Taiwanese engineers and manufacturing people see China eventually taking over Taiwan‘s Sunday commodity manufacturing and try to find work at systems companies rather than components John and I arrive at Guangzhou Airport 6 am Sunday. manufacturers. They hope that their systems We are met by a KYE driver who shows me the text companies will be able to differentiate themselves message on his cell phone which says that John and I when components are sourced entirely by China. are to be driven to the plant until we can check into our hotel this afternoon. Most of the trip to the Summer also talks about one of his big problems: factory is on a modern toll expressway and, since The high turnover among his factory workers. early Sunday mornings have the least amount of Several decades of a one child policy in China have traffic, the drive is pleasant. Also, the expressway produced an older population and people are living meanders through scenic, reforested hill country. longer so the population is not dropping rapidly. Aside from the environmental degradation caused by However, the pool of young, unskilled, and available overpopulation, China is a beautiful place. workers is being rapidly depleted as China‘s economic growth continues. So it‘s likely that in the An hour later John and I arrive at the KYE‘s factory future Chinese employers will have to pay higher and are taken to the demo room, just off the lobby, wages, use more automation, and employ older where I check my email and learn that the KYE team workers to keep China‘s GDP growth rate high. This will arrive from Taiwan in a few days. So John and I trend will eventually reduce China‘s ability to decide to use our time until then to visit and evaluate differentiate their products on cost alone. several of KYE‘s suppliers. Al’s tip Another email tells me that there were three recent motion detections by the WiLife camera I recently After visiting a factory, invite the factory managers to installed in my home garage. So, over the internet in eat lunch or dinner with you. During the meal talk real-time, I check the garage camera and notice that about your personal life, such as your family, your the garage light has been left on, then call my home parents, how and why you got into business, etc. The on Skype - at three cents per minute -, get my sister- Chinese place higher importance on the value you in-law, and ask her to turn the light off. She thinks have in your group than on your individual strengths. it‘s a bit strange for me to call from China just to get someone to turn a light off – but in-laws are like that. Al’s observation My call also prompts the kids to run into the garage so they can wave to me. All factories in Guangdong must provide housing for their employees. New employees must be also be After a few hours Summer, the plant manager and recruited from other provinces rather Guangdong. A one of the permanent Taiwanese staff who lives full- worker can‘t simply show up looking for work at a time at the factory, meets with us, discusses a little factory gate; taking up residency is restricted. business, then invites us to have lunch with his fellow project managers. The factory has a decent restaurant Later that afternoon John and I check into our hotel, for the Taiwanese managers; the restaurant is in a the Dongguan Sheraton, a four to five star hotel close to the factory. I‘m beginning to feel jet lag and, after
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dropping my luggage off in my room, go to the hotel since Camstar makes only analog cameras but WiLife spa for a workout. I feel a little better afterward. markets only digital cameras. Finally after an hour, he sees the bigger picture and realizes that we may be Later that evening we look for a restaurant, even interested in camera parts and accessories and brings though the hotel has several excellent ones, because out some samples. we like variety of foods and flavors. After walking around for a few minutes, we spot a Korean The Camstar factory is a bleak building typical of restaurant which has signs in Chinese, Korean, and many medium-sized factories in China and our tour English. In the restaurant we are surprised to find that of the Camstar factory is disappointing. The factory the receptionist is reading a Bible and in the upstairs seems to be more of a job shop rather than an dining room we‘re greeted by the owner who is assembly line and quality doesn‘t seem to be a wearing a crucifix. She speaks passable English, is priority. Furthermore, Camstar‘s claim of being the very friendly, and tells us she has a brother in largest Chinese manufacturer of surveillance cameras Maryland. In looking over the menu we avoid may be a stretch. poultry, note a dish made of dog, which we resolve to try on another visit, and instead order Gimshi pork. Incidentally, during the tour factory, among the typical 18 to 22 year old workers, I am surprised to Al’s tip find an older couple. When I ask about them, I am told that they are the parents of the factory owner. China is officially an atheist country and expressions of religion are illegal. Avoid religious symbolism and We next take an hour and a half taxi ride to the RDI don‘t discuss religion with the Chinese. factory, almost 15 miles directly west of Camstar‘s factory. Taking side streets, it takes us about an hour Monday to get close to RDI but the taxi driver becomes confused and can‘t locate the address we give him, a John and I plan to visit two suppliers today. The first typical occurrence. Streets aren‘t well marked and supplier, Camstar, is new to us – I found them on the rapid construction means things change rapidly. After Internet and we‘ve exchanged a few emails -- and we several cell calls and about 30 minutes of driving want to see if they have the capability to produce randomly, he gets us to RDI. parts for us. They claim to be the leading analog surveillance camera manufacturer in China. WiLife‘s Unlike Camstar‘s factory building, RDI‘s is bright cameras, on the other hand, are all digital and and well-landscaped. We are met by Wiley, their networked so there is little competitive overlap. salesperson, who takes us to their demo room. It turns Camstar may produce accessories or components out that although RDI does manufacture surveillance which we could buy rather than make ourselves. cameras, it seems to focus on the baby monitor We‘ve been in touch with the second company, RDI, market. Wiley shows us several innovative baby for a while and want to solidify our relation with monitors which come with wireless LCD [liquid them and also see if they have any components in crystal display] television monitors. Since we already development that may interest us. have a business relation with them, we talk about additional ways to do business with each other rather A Camstar salesperson, Anton, meets us at our hotel than feeling each other out as we did with Camstar. lobby and drives us to their factory in Shenzhen. Although the factory is only 33 miles southeast of our Al’s tip hotel, our drive takes about and hour and 45 minutes. The last 10 miles is on side streets and takes about Keep in mind that Chinese supplier-customer and hour and 10 minutes. When we arrive, John and I relationships are often strengthened by cross talk about what WiLife makes and which parts we ownership of companies. It‘s not necessary that you need. At first Anton is puzzled about our interest buy stock in your supplier‘s companies, but it will
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strengthen your relationship if you exhibit a are good so the quality of their suppliers is of less commitment to a long term relationship. concern to us. Freya had some samples for me to test but she had sent them to my office in the U.S.; she We end the tour impressed by the cleanliness and promises to send additional samples to KYE by this organization of the factory. This leads us to believe Saturday. that, unlike Camstar, RDI is oriented toward manufacturing for international OEMs [original Al’s observations equipment manufacturers]. Each worker‘s uniform has the English phrase ―Do it right the first time‖ Freya gives us a cool reception; we think she is emblazoned on the back. annoyed because we meet her at the factory rather than at their more comfortable sales office in Al’s tip Shenzhen, which is south of Dongguan. Freya‘s annoyance reflects southern China‘s ―zones of Once a list of potential suppliers has been identified, desirability.‖ Shenzhen has been a ―special economic make a trip to China to evaluate their capabilities. zone‖ longer than other parts of China, is more During your factory tour look at the overall developed, and resembles Hong Kong more than cleanliness of the work stations, the age and other parts of China. However, in southern China the maintenance of the equipment, the quality assurance most desirable place to live and to be from is Hong processes and personnel, and the level of Kong rather than inland. The further north from Hong professionalism of management and staff. Always Kong, the less desirable the location. ask for names of reference suppliers, customers, and partners, then follow up. Wednesday
We end our discussion with Wiley by giving him a We travel to the plant of our second subcontractor, purchase order for two types of illuminators and take GigaFast in Dongguan, which makes the a taxi back to our hotel. USB/powerline bridges for our indoor camera. A USB/powerline bridge is a device that plugs into, for Tuesday example, a home‘s electric outlet and WiLife‘s system to create a camera surveillance network. A After breakfast John and I are at KYE‘s plant bridge, in other words, allows the owner to create a inspecting the manufacture of a part they are now computer network using the home‘s electrical lines. making for our indoor camera now in production. We Like Lucky Light Electronics, GigaFast doesn‘t make think they‘ve had enough experience making this part the bridges but outsources them to another firm. And so we don‘t anticipate any problems. We also spend a like KYE, GigaFast keeps a crew in China, around few hours closely inspecting several assembled four or five, which overviews the manufacturing on printed circuit boards. Everything looks great. GigaFast‘s behalf. After lunch we travel to Lucky Light Electronics, an We‘ve received some of GigaFast‘s bridges LED [light emitting diode] fabricator I found on the improperly programmed so John and I spend the internet. Lucky assembles LEDs using third party whole day here working on this problem. GigaFast LED suppliers and looks interesting because they has had problems in performing the four quality tests claim that their LEDs‘ efficiency is three times that we require with the bridges. While WiLife provides of the best US supplier but at half the cost. them the equipment to do the testing, in using this We are introduced to Freya, Lucky‘s salesperson, equipment on the factory floor, they unfortunately who talks to us about their LED specifications and used the wrong kinds of tests or did them improperly. later gives us a tour of their factory which is clean As a result, all bridges failed. Furthermore, their and well-run. We‘re here to gain confidence in engineers assumed that the test equipment was faulty Lucky‘s operations and level of quality. Their prices rather than the type of test they were doing. So they
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―repaired‖ the test equipment; they were unsuccessful enclosure for this test but this failure pushes back the of course because there was nothing wrong with the next production run and the release of the product. I equipment in the first place. am upset that they didn‘t inform us of this earlier and I tell KYE to send the computer design files to the Al’s thoughts plastic subcontractor immediately.
Wednesday‘s experience at GigaFast illustrates some Friday of the difficulties in making sure that Chinese products have good quality. Chinese manufacturers This morning we review the details of the truly want to meet world-class quality standards but manufacturing schedule for the outdoor camera. seem more devoted to following procedures than According to the revised schedule, we should have focusing on a quality end-user experience. In this the first plastic case from the supplier ready for case, if one of the quality engineers had stood up and review by the middle of May, a four week slip from said "Something is not right here," the issue could our plans. have been easily resolved. KYE seems to be having problems programming the Thursday memory chips we purchased yesterday from Shenszen. They claim that the socket for the chip is John and I are back at KYE‘s factory and May, the too small to allow the chip to be reliably Taiwanese project manager, and her staff have programmed. They ask us to redesign the printed arrived. We review the parts list for the new outdoor circuit board to accommodate a larger chip so I ask to camera to verify that all parts are ready for the see their programming procedure because we‘ve had production run. We also review their test procedures no problem programming it in the US. After for the production line, the system test procedures, watching an operator do this step, I understand their and KYE‘s quality procedures. difficulty. Rather than using a standard programming socket, they use what is essentially a bare board with During the review we receive some bad news. KYE exposed pads for the electrical connection. The has misplaced some pre-programmed memory chips I operator holds the parts against the pads with her brought with me from the US – a problem because fingers during the programming. Any minute now we need to buy them here and to program them movement by the operator would cause the at KYE‘s factory. programming to fail. I recommend that they get our To source the missing chips, we drive to the kind of socket. Dongguan electronics market, located in a large, A few hours later they come up with a new socket multi-story building filled with small vendors who from Shenzhen. However, even with the new socket each focus on a small range of electronics they still have problems programming the chip components. To find what you want, you walk from because the computer instructions they‘re using are vendor to vendor until you find one who specializes for a different brand of chip. I try to help them but in what you need. They either have the part here, have problems because the instructions are a nearby, or, as in our case, at their affiliate at the combination of Chinese and cryptic English menu Shenzhen electronics market. We send James, a items like ―Motorola way.‖ After an hour of tweaking Taiwanese electrical engineer, to Shenzhen to get the the computer instructions, we set it up as we think is parts. best. In the end the chips are misprogrammed The second bit of news is more troubling: KYE has anyway. failed to give the computer design files for the Saturday camera‘s plastic enclosure to their plastic subcontractor, Merrich. This problem will come up First thing this morning I go to the YKE factory to again in my stay here. We hadn‘t planned to use the make sure the reprogramming is working. It seems to
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be progressing but at a very slow pace. We expected propose a software fix to the problem. I in turn it would take about 20 seconds to program each chip convince them that their software solution would on the production line but it‘s taking about one mask potential problems. After poking around a little minute. After I discuss improvements with the bit on the internet I find a cable test program that they production line manager we are able to improve the can use. time to 30 seconds. During a brief tour of their factory, I am surprised to This afternoon I meet with Merrick, the plastic see an eight year old boy testing cables. The factory vendor, and am surprised to hear that this is the first manager assures me that he is really 26 years old. time they‘ve heard of our new camera and its requirements. Why hasn‘t KYE moved forward with I return to KYE and begin evaluating the first six this vendor? cameras they‘ve made. This is a stressful time for the whole team. With about twelve people looking over Sunday my shoulder I connect each camera to the test unit John and I take a break and go with several factory and start the test program. All six cameras fail the people on an excursion to Waterfall Mountain, about test. So I ask for a voltmeter to at least see if the six miles east of the factory. The hike on a paved trail voltages are correct and find that each camera has to the top of the mountain, a 2300 foot elevation gain, half of the correct voltage. It‘s late and the factory is is fairly easy but with humidity nearly 100% I am shutting down for the night so I have to wait until drenched with sweat by the time I return to the hotel. tomorrow to find out what‘s going on. Tuesday After a quick shower, change of clothes, and lunch, John and I go shopping to Human, a noted shopping I‘m at the KYE factory again trying to determine why district known for price dickering. I‘m not much into the cameras aren‘t working. After a few minutes of shopping but am entertained watching the process. work I discover that the voltage regulator is the We go to a clothes shop then a CD/DVD shop, which wrong type. The correct part was listed on the list of seems to have limited selection and under-stocked materials we sent but somehow the wrong part was shelves. To get what you want there you need to ordered. Furthermore, checking the part in more know the secret: One of the bare walls is a hidden detail, I discover that two changes we made had not door. I hand my son‘s list of DVDs to a clerk who been implemented here. The changes were not spends the next 20 minutes excitedly running around transmitted to KYE by WiLife. the hidden shop filling my order. Doing more checking, I also notice some problems Monday with the hand-soldering on the printed circuit board. John meets with the suppliers of our wall mount WiLife and Dongguan agreed to make this part with a bracket while I travel to Yes Cable, our Ethernet lead-free process. Several of the parts were not lead- cable vendor, to review their test process. On my last free so the correct parts had to be soldered manually. trip we talked to them about a quality problem we They are extremely difficult to solder by hand so I‘m found with some of their cables: Their cables failed not surprised to find several shorts and opens in their to operate with our system. In that meeting, we wiring. discovered that Yes failed to do one of the tests we I receive updated test software from WiLife and test had recommended. So John and I proposed a more it on my laptop before installing it on the test complete test which they agreed to implement. machines on the production line. Yes now tells me that the test we proposed was not Wednesday implemented because it failed. Digging into the cause I discover that their tester has a problem and I We go to the Shenszhen Electronics Market to find propose a hardware fix to the problem. They instead the correct voltage regulators. We wander around the
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floors of the electronics market for a while. This manufacturer as soon as possible, preferably one market is much larger than the Dongguan electronics which does not have a Taiwanese relation. market and you can find just about any electronics component, subsystem, and test equipment ever Al’s thoughts made. After an hour we locate a vendor who will sell I‘ve had difficulties in the past with KYE‘s engineers us fifty units at a reasonable price. We wait another who have tried to redesign things which don‘t need to half hour for the parts to arrive then consummate the be redesigned such as our plastic case. The transaction. Later we wander the floors of the market Taiwanese mangers try to interject themselves into a bit and then return to the factory to spend the rest of trivial matters so that they will be worthwhile to keep the evening replacing the regulators. around. Twenty years ago, when a lot of US Thursday manufacturing left for Japan, I saw the same thing. The Taiwanese are doing this to maintain their John and I continue troubleshooting the new outdoor position as they see Chinese engineers becoming camera. We get twenty more units from more and more capable so I am sympathetic to their manufacturing and find that none of them work. As I position. dig into them, I find more manufacturing errors: shorts, opens, components in wrong orientations, etc. The meeting ends and I tell the KYE team that I‘ll When they hear about these problems, the Taiwan return to the factory in the next two days to continue team gets anxious because they are scheduled to fly debugging the cameras. Who will accompany me, out early tomorrow morning. they ask, since they‘re all returning to Taiwan early tomorrow morning. I tell them I know my way Tonight we have the ―outdoor camera production around the factory and that if I need something I can evaluation meeting.‖ Everyone is tense. I begin by ask one of the Chinese production engineers with giving my report: None of the cameras is working but whom I‘ve worked in the past. They are incredulous I believe that the issues are production-related, not that I would ask this after such a rancorous meeting. engineering-related, I say. May, the Taiwanese The Taiwanese are loath to let their customers project manager, believes the production is fine and interact directly with the native factory staff. If tells us to return to the US and redesign the printed customers become comfortable dealing with circuit boards. mainland Chinese, of what value is KYE? They quickly huddle and one of them, Jimmy, volunteers The discussion then turns to the plastic case. The to stay in China until I leave. design files are being held up for evaluation by KYE‘s mechanical design team in Taiwan. They‘ve Friday proposed a redesign that would delay production by two weeks. I tell May that this is absolutely Since my flight isn‘t until Sunday, I might as well do impossible: WiLife engineers have tested the design something useful until then. So I spend the entire day and WiLife management has approved it. debugging the circuit board for the camera. It heartens me when I get one of the cameras to work At this point May loses control and begins screaming later in the day. This confirms my suspicion that the in Chinese to her team: She wants to intimidate the primary problem is sloppy manufacturing. KYE team into backing her against us. Her message is that KYE should stop doing business with WiLife. In defense of KYE: This is the most complex circuit However, she‘s unaware that I understand much of board they‘ve manufactured up to now and it pushes what she‘s saying; I‘ve been taking courses in them to the limits of their capabilities. KYE top Mandarin. I resolve to tell WiLife that it would be in management, which seeks to develop KYE‘s ability WiLife‘s best interests to get an alternate contract to make products with higher margins than computer mice, wants to work with WiLife because it forces
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their factory to enhance their capabilities. The bulk of US house so we walk back to our hotel then drive to KYE‘s current output is fairly simple mice and game the airport. I‘m not looking forward to the long flight controllers. home.
Saturday Al’s tips for traveling in China
Knowing that our design is correct, I perform quick 1. China is mostly BYOTP [bring your own toilet checks on the remaining units. Manufacturing yields paper] so carry tissue paper with you when you leave thus far are extremely low, less than 20%. I leave two your hotel. of the working units with Jimmy and take the rest with me to hand-carry back to WiLife. We also 2. Take a GPS receiver with you. Mark the important package the non-working units and express ship them waypoints like your hotel, your factory, and supplier to WiLife. I thank Jimmy for staying and helping me locations. You can use it guide your way when your get the cameras working. factory forgets to pick you up or when guiding your taxi driver who will inevitably get lost. Sunday 3. Plan a trip to China as you would plan an extended Heading home at last! backpacking trip to the wilderness. Start with a backpacking checklist but scratch off the tent, After breakfast John and I walk to the local ―Main sleeping bag and sleeping pad. Pretty much Street‖ to a bargain shopping arcade we spotted a few everything else on your list will be useful. nights before. I buy a gym bag to hold the samples I will hand carry to WiLife. We have lunch at 4. If you go out for a massage, which is commonly arestaurant which has pictured menu items so we available in China, make sure you tell the receptionist make out fairly well. Later we take a taxi to a that you want a ―foot massage.‖ I‘ve been told that a furniture market about three miles away and, as regular massage involves more intimate contact than usual, the driver gets lost. The furniture is reasonably you may be comfortable with. priced but more high-end than would fit in a modest
Al Mudrow is an engineer for WiLife, Draper, Utah. He has worked in the computer and electronics industries for over thirty years in various design, design management, and general management positions. He has a Master‘s in computer engineering and an MBA, both from Brigham Young University. Al has been at WiLife for two years where he leads the design and development for WiLife‘s surveillance cameras. His email is [email protected].
Gabriel Jaskolka is an associate professor of management at Tiffin University, Tiffin, Ohio, where he teaches undergraduate and graduate management courses. Before coming to higher education he has worked in real estate development and sales. He received his Ph.D. in management from the State University of New York at Buffalo. His email is [email protected].
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CUSTOMER SATISFACTION MEASUREMENT AND THE MANAGEMENT OF CUSTOMER SERVICES: A CASE STUDY Jonathan H. Silver, Alvernia College
ABSTRACT
A qualitative inquiry was used to supplement a comprehensive customer satisfaction measurement program and explore the cause of lagging satisfaction scores in a particular region of an electric company‘s service area. This case study highlights the interplay of customers‘ transaction experiences, salient consumer events and corporate communications in building and enhancing strong customer relationships and positive brand perception.
INTRODUCTION Well-managed service providers regularly assess their performance on the SERVQUAL dimensions The contemporary approach to customer satisfaction through the use of questionnaires that incorporate a measurement consists of the systematic variety of rating scales. Data are collected by administration of questionnaires with predetermined telephone interviews, by mailed questionnaires and response categories. by electronic means.
A number of authors (Fournier & Mick, 1999; SERVQUAL questionnaires provide systematic Parasuraman, Zeithaml & Berry, 1988; Zeithaml, customer feedback that service providers use to Bitner & Gremler, 2006) have reviewed the well- monitor trends in their customer service performance established SERVQUAL approach to measuring and to make internal regional comparisons and service quality and have described five dimensions of external competitive assessments. customer satisfaction. The five SERVQUAL dimensions are: In the present case, an electric utility observed consistent sub-par satisfaction ratings in a particular Reliability - The customers‘ perception that a desired region of the company‘s service area. service is provided as promised in a dependable and reliable manner These sub-par ratings persisted over time despite steady operational improvements. As a result, the Responsiveness - The customers‘ perception that a company suspected that the lower regional ratings service provider is willing to help and promptly were due to a different set of customer expectations. responds to requests The service region in question is a rural/resort area Assurance - The customers‘ appraisal of the characterized by an influx of new residents migrating knowledge and courtesy displayed by the service away from urban centers. It was believed that these provider including the ability of the provider to new residents were not accustomed to and not likely inspire trust and confidence in the customer to tolerate weather-related interruptions in their electric service. In addition, management suspected Empathy - The customers‘ perception that they are that urban consumers are generally more demanding receiving individual attention from a provider who of service providers and consequently harder to cares about their needs please. Tangibles - The impact on the customer of the A qualitative approach was employed to investigate appearance of physical facilities, equipment, the likelihood that the lower customer satisfaction personnel and written materials
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ratings were due to a new and different consumer service area and resided, for practical reasons, mind set. proximate to the meeting location (that is, within a 15-minute drive). METHOD Twenty eight customers were recruited for two The development of the discussion guide and the sessions. In the development of the list of recruits, an recruitment of participants are two noteworthy effort was made to obtain gender balance and a broad methodological issues. Once the guide and the range of ages. The provision of a meal and a $65 recruitment strategy are set the conduct of the session honorarium were inducements for participation. In using a trained moderator and the recording of the addition, participants arriving at least 15 minutes discussion for analysis follow customary procedures. prior to the start of the session were entered in a lottery for a $65 prize to encourage a prompt start. Discussion Guide Development In the event, the show rate of recruits was 54% The discussion guide was organized along the yielding a group of 8 participants for the first session SERVQUAL dimensions of service quality and was and 6 for the second. Participants ranged in age from designed to probe customer attitudes, awareness and 30 to 85 years old. There were 9 men and 5 women beliefs concerning the following topics: among the participants. Knowledge of the nature of electric service outages The session was conducted by a trained and Views of the electric company‘s efforts to experienced moderator who directed group avoid service outages discussion to the topics listed in the guide, Perceptions of the strengths, weaknesses and encouraged participant interaction and probed opportunities to improve the service relevant themes. Company representatives viewed restoration program the session unobtrusively and participants were fully Customer service expectations, value informed about the nature and purpose of the sessions judgments and price comparisons so that their consent to continue could be obtained before the discussion began. Comparisons of service expectations and satisfaction with other similar service RESULTS providers Awareness and attitudes towards the The discussion participants were cooperative and company‘s community service efforts contributed to productive sessions. In general, they Consumer preferences with respect to the displayed a high level of satisfaction with the company‘s marketing and customer service performance of the electric company. They were communications well aware of improving service reliability and they Recruitment Strategy were especially complementary of the company‘s rapid response to power outages. The main goal of recruitment was to locate electric company customers who were likely to provide a Participants reported that the design and performance useful perspective on the topics contained in the of the company‘s outage reporting system exceeded discussion guide. Towards this end, a list of their expectations. They found the system to be well customers was developed to recruit focus group designed and easy to navigate. In fact, they were participants. Customers were included in the delighted with the ability to opt out of the automated recruitment list if they were year-round residents, had voice response system and speak to a customer lived in the region at least one year but less than five, service representative. Furthermore, the participants had received their electric service from another felt that the representative they reached were electric utility before moving into the host company‘s concerned, courteous and well informed. Finally,
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such options as electing to receive phone calls from In addition, when participants were asked to compare the company with updates on the progress of service their electric company with other similar service restoration as well as the option to receive a wake-up providers (telephone, cable, ISP, etc.) electric call from the company exceed customer expectations. company employees are considered to be an asset. In general, participants report that their interactions with The participants also talked about company field electric company employees are superior to other personnel displaying extra effort to restore electric service providers. However, brand perceptions are service and their appreciation of the work. Both diminished due to the perceived lack of choice. customer service representatives and field service ―…other companies compete for our business; if personnel are viewed as dedicated and committed to we‘re not happy we can choose a competitor, but meeting customer needs. The participants either had we‘re stuck with you.‖ experienced encounters to support these positive views or they had heard stories from friends, Finally, a communications gap was identified that neighbors or relatives to substantiate the perspective. serves to erode the company‘s relationship with its In either case, the perceptions of customer-oriented customers. Other than a vague awareness of personnel enhance the image of the company. assistance programs for the needy and the elderly, participants are unaware of numerous community In counterpoint to the high level of satisfaction with development efforts. Furthermore, the participants power restoration efforts, participants voiced concern indicate that as they become aware of these efforts, that the company was not doing everything it could to they are appreciated. serve their needs. For example, participants expressed concern that trimming tree limbs around From a technology perspective, participants were not power lines and conducting preventative maintenance aware of the successful implementation of a new on electrical equipment seemed to be postponed in automated meter reading system and numerous order to reduce costs and maintain profit goals. improvements to the electric distribution system. Along similar lines, customers articulated a feeling The lack of communication about these important that the company was not innovative, that is, it did actions contributes to the perception that the not use state-of-the-art technology to improve the company is not taking any important action. reliability of electric service. In sum, participants voiced a suspicion that corners were being cut at their In sum, participants doubt that management is expense. concerned about their needs, that the company acts to protect the environment or that the company cares The doubts about corporate management‘s concern about energy efficiency. for the customer contributed to restrained value perceptions. For example, the cost of electric heating When comparing the company‘s communications to is considered to be excessive. What‘s more, the other similar companies, the electric company is negative impact of this perception is exacerbated by viewed as lax while the others are viewed as more the unmet customer need for information, advice and effective communicators. Other service provides, assistance concerning energy efficiency and like telephone companies, cable and satellite conservation efforts that can by used to reduce the television companies and internet service providers size of home heating bills. This gap in service are all seen to employ television, radio and print ads. expectations contributes to the view that the company In addition, the other companies obtain news is not concerned with the affordability of electricity. coverage on important issues. The electric company One participant summed up the position, ―They‘re is viewed as relatively uncommunicative. concerned with their profits and bonuses and couldn‘t And while the electric company may feel it is care less if we can afford to heat our homes.‖ working on new channels of communication, as
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demonstrated by a newly redesigned website, not one Additionally, the apparent lack of competition participant reported visiting the site. contributes to the customers‘ view of corporate indifference to their costs. Customers feel that Participants strongly suggest that their impression of increased costs are passed onto them through rate the company would improve if appropriate cases and the lack of an alternative renders them communications concerning issues of customer helpless. interest were made. 3. The company does not use technological DISCUSSION innovation to improve its performance
The results of the focus group suggest that In general, customer perceptions of corporate participants do not have unreasonable customer innovation are related to positive brand perceptions. service expectations of the electric company. Relative The drive to innovate, spurred by competitive to participants‘ prior electric company service pressure, is seen as a positive force. The belief that experience, their current provider is doing well and the electric company is not innovative and fails to use the overall performance of the electric company is the latest technology is related to the view that satisfactory relative to other similar service providers. company management is focused on profits and indifferent to customer needs. However, participants have three major concerns which appear to be rooted in a communications gap A communications gap has been identified which that fosters a weakened customer relationship. undermines favorable brand perceptions and raises doubts about management‘s effectiveness and their 1. The company does not care about my needs concern for the customer. There is an implicit assumption that if the company The company should develop communications does not inform customers about its efforts to meet programs on energy efficiency and conservation, on the customers‘ needs, then its activities are focused the use of innovative technology to improve electric on the corporation‘s profitability. In this light, service, on management efforts to avoid price customer service is at best lip service. As a result, increases and on the company‘s community participants feel that cost reduction efforts and development work. A multi-channel efficiency gains are focused on profitability rather communications strategy is suggested. than service enhancement. MANAGERIAL IMPLICATIONS 2. The company is indifferent to the customers‘ cost of electricity The discussion group findings support the following management actions. Another factor contributing to the suspicion that customer needs do not count is the apparent corporate 1. The integration of transaction-based indifference to the price of electricity. customer services, corporate commu- nications and public relations efforts. Rates and cost per kilowatt hour are viewed as Customers should be informed and corporate trivia. What matters to the customer is the reminded of the value of the services that are size of the electric bill especially when electricity is available. In addition, customers need to be used for home heating. Customers feel that if the convinced of the commitment and effort company were not totally absorbed in its own success sustained to meet their needs. and profitability and had some concern for them then they would provide information about energy 2. Effective corporate communication is an efficiency, conservation and how to make electric essential building block for maintaining and heat affordable.
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enhancing a satisfactory customer ADDITIONAL QUESTIONS relationship. This qualitative inquiry was motivated by the lagging The lack of communication about corporate performance of a particular region of the company‘s accomplishment, i.e., about community service area. And while the findings of the work development, the innovative use of point to a communications gap that ought to be technology or about the corporate addressed, as exploratory research, we do not know commitment to creating value for customers how widespread the gap may be. Further, because leads to the conclusion among customers the region in question has unique characteristics we that such efforts are neither valued nor do not know if the findings are applicable to other pursued by the company. areas with more traditional urban and suburban characteristics. As a result, additional measurement 3. The impact of salient events endures for an is suggested to determine the extent of the extended period. As a result, companies communications among all customers. Alternately, face a challenge of managing the residual carefully evaluated pilot programs aimed at reducing impact of such events. Companies should the communications gap can be administered to aim to position positive events so as to determine new approaches to maintain and enhance diminish the lasting impact of adverse strong customer relationships. customer experiences and aim communications toward reducing the life- REFERENCES cycle of salient events. Fournier, S. & Mick, D.G. (1999). Rediscovering 4. Finally, systematic customer satisfaction satisfaction. Journal of Marketing, 63, 5-23. measurement is enhanced by qualitative inquiry aimed at identifying the root cause Parasuraman, A., Zeithaml, V.A., & Berry, L.L. of dissatisfaction. Interacting with (1988). SERVQUAL: A multiple-item scale for customers and exploring their attitudes, measuring consumer perception of service quality. perceptions and beliefs can create valuable Journal of Retailing, 64, 12-40. insights for the successful management of Zeithaml, V.A., Bitner, M.J., & Gremler, D.D. customer services and corporate (2006). Services marketing: Integrating customer communications efforts. focus across the firm (4th ed.). Boston: McGraw- Hill/Irwin.
Jonathan H. Silver is an assistant professor of business at Alvernia College.
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INCOME DENSITY AND MARKET POTENTIAL IN PENNSYLVANIA SMALL TOWNS William Bellinger, Dickinson College ______
ABSTRACT This paper compares and analyzes geographical patterns of income density (income per unit of area) and median household income for a set of 15 Pennsylvania small towns using 2000 Census data at the block group level. The primary finding of the study is that all of these towns contain central clusters of high income density block groups much like those found in major central cities, and that these central clusters often contain high percentages of the town‘s aggregate income despite having lower median household incomes. The characteristics of these high income density neighborhoods are described, and the possibility of unmet retail demand in central small towns is discussed. ______
INTRODUCTION metropolitan area.‖ (ICIC) To this point relatively little effort has been made to apply the income Income density, which measures aggregate income density concept to small towns. For example, the within a given geographic area, has proven useful in ICIC concentrates its research and policy efforts in analyzing and promoting the retail potential of the nation‘s largest 100 cities. relatively poor urban neighborhoods. Since the mid- 90s this concept has been used by Dr. Michael Porter The goal of this paper is to examine income density and others to make a case that inner city patterns and the characteristics of high income neighborhoods with relatively low median household density neighborhoods for a sample of small towns in incomes contain large pools of untapped purchasing Pennsylvania, and to suggest some preliminary power due to their higher population density.1 The implications of these patterns for the market areas Initiative for a Competitive Inner City (ICIC), an and commercial potential of high income density organization founded by Dr. Porter in 1994, has small town neighborhoods. The primary finding of utilized the concept of income density and other this study is that there is no systematic or general locational factors to make the case that inner city relationship between median income levels and neighborhoods have untapped comparative income density in small town neighborhoods. advantages in retail, service, and manufacturing However, high income density neighborhoods are operations. This concept has already been measured highly correlated with housing density, indicating and used to support inner-city development in some that in many small towns income density is likely to large cities. The Davis and Habiby (1999) conclude be higher in older neighborhoods closer to the central that there is substantial profit potential in these inner- business district. city neighborhoods because of their highly concentrated markets. For example, Figure 1 While negative results are often uninteresting to identifies high density market areas in Philadelphia. academic audiences, the finding that there is no ―Despite 33 percent of Philadelphia‘s inner city consistent correlation between median household population living in poverty, it has roughly ten times income and income density is far from negative in its the income density of the rest of the surrounding policy implications. Poor neighborhoods are likely to contain as much spending power as non-poor areas in most Pennsylvania small towns. If other factors such 1 Michael Porter, ―The Competitive Advantage of the as traffic flows, land availability, and crime are not a Inner City‖ Harvard Business Review, v. 73 (May- hindrance, retail opportunities in such neighborhoods June 1995), pp. 55-71. may be far more promising than is generally
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perceived. Because of the limited scale of small and aggregate income to calculate income density for town neighborhoods, however, commercial any geographic area from the state or county level opportunities may be limited to small scale down to the individual block. The U.S. Census convenience stores and local services unless land provides the total land (and water) area in square availability and traffic patterns permit larger retail meters for each geographic area. 2 A simple operations. arithmetic calculation allows income density to be measured per square acre or square mile.3 Aggregate Figure 1: Philadelphia‘s income per acre will be the most commonly used High Income Density Neighborhoods measure of income density in this paper, although aggregate income per square meter and per mile may also appear. The choice of land area measure has no effect on the significance of the relationships being tested in this study. Aggregate household income for each type of geographic area is also available directly from the Census. Many demographic and social variables are also available from the complete sample or the 1 in 6 detailed survey of the decennial census.
Income density will be analyzed in greater detail for a data set of 15 boroughs and small cities. These places have an average population of 21,859, ranging in Source: ICIC website population from 8,998 in Lewistown to nearly 31,000 in Williamsport. McKeesport is an industrial suburb This study also tests the roles of various social and of Pittsburg, while the others are scattered throughout structural factors in determining income density. smaller metropolitan and rural areas in Pennsylvania. Using regression analysis to test the correlation The block groups in these towns have the following between income density and social variables related mean values for household income and income per to race, crime, family status, town size and group acre (see Table 1). Among the more interesting housing population will provide some evidence of the characteristics of higher income density neighborhoods. However, housing density is 2 certainly the most significant determinant of income To calculate income density, go to the American density (with a simple correlation of .70), so in the Factfinder page (http://factfinder.census.gov) , click on data sets on the left side of the page, choose the absence of housing density the overall predictive detailed tables option for the Census 2000 summary value of the empirical model is very low. file SF 1, choose your geographic options and aggregate income measures of choice (aggregate THE DATA SET household income, aggregate household earnings, etc) , produce the table, then click the dark blue Equation 1 defines income density as either aggregate ―options‖ button on the top, then click ―show income per unit of geographic area or as per-capita geographic identifiers‖. Amongst the many lines of income times population density. All data used in this irrelevant numerage is the measure of total land area in square meters. Downloading this table into an AggregateIncome excel file will permit a simple calculation of IncomeDensity aggregate income per square meter. Alternatively, area the variables listed in the custom tables option (1) population include geographic identifiers at the end of the PercapitaIncome variables list. area analysis comes from the 2000 U.S. Census. The 3 1 acre = 4,046.85642 square meters. 1 square mile Census provides sufficient information on land area = 2,589,988.11 square meters.
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findings of this very general set of data is that the block 16 16 highest average income density occurs in Hazleton, a groups relatively old mining and manufacturing town which Uniontown Mean 23,467 91,593 is one of only 6 towns in the data set with an average block 25 25 median household income of less than $30,000. groups Williamsport Mean 30,765 120,940 Table 1: Average Block Group Income block 46 46 groups Median Income Place Household per INCOME DENSITY VERSUS Income acre HOUSEHOLD INCOME Total Mean $32,130 $123,289 One initial question in this study is how to identify block 370 370 low versus high income block groups. Within this groups sample income density is calculated for all block Beaver Falls Mean 29,315 99,232 groups, block groups with median household incomes block 17 17 groups below 75 percent of the county average, block groups Carlisle Mean 36,113 155,117 with median household incomes below 1.25 times the block 15 15 federal poverty level for a family of four and block groups groups with household poverty rates greater than 20 Chambersburg Mean 35,555 96,371 percent. Comparisons of income density are made block 17 17 across the various income categories, with relatively groups minor differences in the results. Columbia Mean 33,976 149,393 block 7 7 The first categorization measures low income groups neighborhoods as having median household incomes Hazleton Mean 29,161 181,815 less than 75 percent of the county median. Table 2 block 32 32 displays the results of t-tests for the equality of means groups for income density in low income block groups Johnstown Mean 32,683 103,977 (those with median incomes below 75 percent of the block 34 34 county average) and other block groups for 18 small groups Lebanon Mean 36,294 143,420 towns in Pennsylvania. In Table 2 income density is block 39 39 measured in dollars of household income per square groups meter. The significance of the figures may be better Lewistown Mean 24,116 113,252 understood by translating them into dollars of income block 11 11 per acre. At 4,046.85642 square meters per acre, groups these figures range from 59,732 dollars per acre in McKeesport Mean 24,346 144,217 the low income areas of New Castle to 204,366 block 23 23 dollars per acre in the low income neighborhoods of groups Lebanon. Meadville Mean 30,865 76,991 block 24 24 groups New Castle Mean 24,211 92,551 block 14 14 groups Pottstown Mean 49,906 101,065 block 21 21 groups Pottsville Mean 33,658 148,532
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Table 2: Income/Square Meter by 75 percent INCOME DENSITY IN of County Median Income SMALL TOWN POOR NEIGHBORHOODS
PLACE INCOME INCOME T-TEST Another noteworthy result of the previous DENSITY: DENSITY: VALUE comparison is that New Castle is far less well-off BELOW 75% OTHER financially than the other towns, raising the OF MEDIAN Beaver Falls 22.16 27.17 -.788 possibility that income density may not be able to (n= 9) (n=8) hold its own in truly poor neighborhoods. More Carlisle 43.48 32.45 .934 generally, measuring low income areas relative to the (n= 8) (n=7) Chambersburg 29.53 21.43 1.13 county median income does not create a directly (n= 5) (n=12) comparable measure across individual towns in the Columbia 39.88 32.97 .389 sample. For this reason a separate comparison of (n= 4) (n=3) income density levels was conducted for block Hazleton 40.44 46.42 -.552 (n= 8) (n=24) groups with a median household income of more or Johnstown 29.51 24.54 .778 less than 1.25 times the federal poverty line for a (n= 9) (n=26) family of 4. This cut off point for household income Lebanon* 50.50 24.97 2.13 (n=16) (n=23) in 2000 was 1.25 x $17,463, or $21,829. Three of the Lewistown 31.50 23.77 .812 15 towns in the sample were excluded because they (n= 6) (n=5) had one or zero block groups with household McKeesport 32.92 39.87 -.760 (n=14) (n=9) incomes below the 1.25 times poverty criterion. Of Meadville 25.80 15.64 1.35 the remaining 12 towns, 6 had lower income densities (n= 8) (n=16) and 6 had higher income densities in their poor block New Castle* 14.76 30.98 -3.99 groups, again suggesting the lack of a clear pattern (n= 7) (n=7) Pottstown* 33.06 17.62 2.28 between median income and income density. (n=10) (n=11) Overall, income density was somewhat lower in poor Pottsville 32.62 (n= 4) 38.06 -.323 block groups, with a t-statistic of -2.36 for the (n=12) difference of means for the two groups across all Uniontown 22.78 (n=11) 22.52 .042 (n=14) towns. However, as with the previous results, the Williamsport 30.24 (n=13) 29.75 .085 variance across towns seems to be the more (n=33) important finding. These results are presented in *significant at the .05 level Table 3. While 4 towns have differences in income Regarding the differences in means between the low densities that are at least marginally significant, only income and high income block groups, while Beaver Falls achieves a significantly higher income Pottstown and Lebanon have significantly higher density in its poor neighborhoods. While Carlisle has income densities in their lower income block groups the highest income density of any borough in its poor and New Castle has a significantly lower income block groups and the largest absolute difference in density in its lower income block groups, the more favor of its poor areas, these areas do not achieve a general conclusion is that income density has no clear statistically significant advantage over Carlisle‘s non- or general relationship to median household income poor neighborhoods. in Pennsylvania towns. Twelve of the 15 communities have insignificant differences in mean income density, though 10 of the 15 have higher average densities in their poorer neighborhoods.
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Table 3: Income Densities Separated Table 4: Income Densities Separated by a 20 at 1.25 Times the Poverty Line percent Poverty Rate PLACE INCOME INCOME T-TEST PLACE INCOME INCOME T-TEST DENSITY: DENSITY: VALUE DENSITY: DENSITY: VALUE NEAR- OTHER NEAR- OTHER POVERTY POVERTY INCOME INCOME Beaver Falls 30.32 (n=6) 21.36 (n=11) 1.45 Carlisle 47.44 (n=3) 36.05 (n=12) .765 Beaver 32.83 22.74 2.26 Chambersburg 29.48 (n=4) 22.07 (n=13) .954 Falls** (n= 3) (n=14) Hazleton 52.64 (n=7) 42.77 (n=25) .876 Carlisle 47.44 36.05 1.12 Johnstown 29.24 (n=9) 24.42 (n=25) .789 (n= 3) (n=12) Lewistown 31.50 (n=6) 23.77 (n=5) .812 Hazleton 39.70 45.90 -.478 McKeesport 30.54 (n=10) 39.55 (n=13) -1.04 (n= 5) (n=27) Meadville 21.79 (n=9) 17.37 (n=15) .612 Johnstown 26.51 25.64 .114 New Castle* 17.70 (n=7) 28.04 (n=7) -1.90 (n= 8) (n=27) Pottstown** 38.39 (n=3) 22.74 (n=18) 3.20 Lebanon* 19.01 36.81 -2.09 Pottsville** 13.08 (n=2) 40.08 (n=14) -3.31 (n= 3) (n=36) Uniontown 23.90 (n=13) 21.26 (n=12) .415 Lewistown 31.34 25.19 .637 Williamsport 27.23 (n=16) 31.30 (n=30) -.748 (n= 5) (n= 6) **significant at the .05 level McKeesport* 23.69 40.86 -2.03 *significant at the .10 level (n= 7) (n=16) Meadville 23.38 17.23 .776 A fourth measure is meant to concentrate more (n= 7) (n=17) specifically on the relation between median New Castle** 15.52 28.38 -2.58 household income and income density. This measure (n= 6) (n= 8) simply compares above and below average values for Pottsville 30.89 38.04 -.383 these two alternative income measures. The lack of a (n= 3) (n=13) Uniontown 22.98 22.25 .114 clear pattern between median income and income (n=13) (n=12) density can be clearly demonstrated through a simple Williamsport 24.27 31.25 -1.23 cross-tabulation of above and below average income (n= 9) (n=37) density and median household income block groups. **significant at the .05 level See Table 5 for these findings. The significance of Table 5 is that the majority of block groups in the *significant at the .10 level sample (201/370) have either above average median The final measure of poor neighborhoods defines incomes and below average income densities (128), poverty in terms of the percentage of poor or below average incomes and above average income households (See Table 4). This has the advantage of densities (73). Table 6 at the end of this article comparing each household to its relevant poverty demonstrates this same random pattern for specific standard, which varies considerably by number of towns in the data set. people in the household. Two of the 15 towns had Table 5: Crosstabulation between Income Density zero poor neighborhoods by this definition. The and Median Household Income results are similar for this measure as well. Again, Income Density the few towns with significant differences across Median Below Above Total poverty definitions are exceptions to a clear overall Household mean mean pattern. There is no systematic pattern between the Income income density of poor and non-poor neighborhoods Above in Pennsylvania small towns. Mean 128 100 228 Below 69 73 142 Mean Total 197 173 370
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HIGH INCOME DENSITY CLUSTERS clusters of high density block groups located near the AND AGGREGATE INCOME central business district. Aggregate incomes for these central high density clusters are shown in Table 7 The final step in identifying the scope of small town below. In some cases individual block groups with high income density neighborhoods is to identify the non-residential uses divide a single cluster of into number and combined size of contiguous block two parts, and in some cases individual block groups groups with high income densities. High density with high income density are located outside of the clusters were identified as any set of 3 or more central core of the towns. However, the one or two contiguous block groups with income density above central high income clusters contain a significant the average for that borough or city. All of the 15 portion of the total income and purchasing power of small towns in this data set have one or two clusters each town, although only 4 towns (in boldface in of above average income density located near the Table 7) have a majority of their aggregate income in central business district. Examples of high income their high density cluster. density clusters are seen in Figures 2 and 3. Table 7: Aggregate Income for High Income Density Figure 2: Columbia High Median Clusters and High Income Density Areas* PLACE HIGH I.D. OTHER TOTAL CLUSTERS AREAS Beaver Falls $141,080,900 $142,741,500 $283,822,400 Carlisle 99,866,300 265,245,300 365,111,600 Chambersburg 245,236,300 206,455,100 451,691,400 Columbia 66,404,000 102,480,200 168,884,200 Hazleton 294,731,300 218,715,800 513,447,100 Johnstown 201,878,400 378,840,700 580,719,100 Lebanon 273,004,500 549,812,300 822,816,800 Lewistown 72,650,000 91,374,500 164,024,500 McKeesport 141,314,500 157,052,200 298,366,700 Meadville 151,065,200 207,720,100 358,785,300 New Castle 230,831,200 95,557,900 326,389,100 Pottstown 168,707,400 442,224,900 610,932,300 Pottsville 97,974,000 198,642,100 296,616,100 Uniontown 179,900,100 127,137,900 307,038,000 *Red=High Income Density, Blue=High Median Williamsport 268,411,700 448,548,300 716,960,000 Income, Purple = High for Both In some respects the general pattern of high income Figure 3: Carlisle High Median Income Areas density clusters in central areas mirrors the general pattern found in large cities. In some cases one low income density block group, generally a non- residential area, is located within a larger high income density cluster. One such group at most is included in the larger high income areas measured in this paper.
CHARACTERISTICS OF HIGH DENSITY CLUSTERS
For the entire data set the demographic and economic differences between the high density clusters and Some block groups with above average income other areas are not particularly stark. However, for densities are located elsewhere and not every central some towns demographic differences may play a part block group has above average income density. in determining the most efficient development and Every town in this data set features one or two retail choices. For example, African-Americans
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make up 9.3 percent of the high density cluster regard to the income numerator. For example, population and 7.8 percent of the low density college students tend to have low current incomes, population for the entire sample. The percentage of although their spending may well outpace their the population living below the poverty line is about incomes. Prisoners also have very low current 16 percent for both areas. Thirty-nine percent of incomes, but unlike college students they don‘t get households are married in high density areas out much. compared to 45.7 percent in other areas, while 58.3 percent are families in high density clusters versus Two sets of regressions are reported in the following 63.5 percent elsewhere. Nearly 4 percent of high tables. Table 8 summarizes the findings for all block density area workers rely on public transportation groups in the sample, while Table 9 displays results versus less than 2 percent elsewhere. for those block groups with below 75 percent of the median county income and also for block groups with Overall, the lack of demographic distinctiveness poverty rates above 20 percent. The results reported among high income density neighborhoods creates a in Table 8 are relatively robust, and indicate a somewhat different situation from that in major dominant role for housing density (housing units per cities. Except in towns where ethnic diversity is square mile) in determining income density. If this unusually significant, specialty retail is less likely to variable is excluded from the estimating equation, as find a niche than in larger and more diverse urban in equation 8-2, adjusted R2 values drop to about .1 areas. However, locational convenience may still be a and the equation becomes a very poor predictor of factor in encouraging greater retail development in income density. However, even in equation 7-2 most and near central small town neighborhoods. other variables show relatively consistent results without housing density included. As expected, REGRESSION ANALYSIS median income has a significantly positive relation to income density. The consistently negative and The mixed and predominantly insignificant simple significant values for group housing are also correlations between median income poverty expected. The crime, race, housing occupancy and measures (Table 4) and income density across this family variables are somewhat less consistent or sample raise additional questions regarding the more difficult to interpret. The mixed significance for determinants of income density. Controlling for the crime index should be interpreted carefully. On housing density, which is largely determined by an one hand it is possible that lower income or densely inverse relationship between housing size and housed neighborhoods encourage more property housing age, various measures of income and crime. On the other hand high crime rates tend to neighborhood social health are likely to show more encourage abandonment and therefore lower income significant and expected relationships to income density. density. In order to address these questions a series of regressions were run using a housing density Table 8: Income Density Regressions for measure (total housing units per square mile) and a All Block Groups series of variables related to general economic and social factors such as race, crime rates, marital status, EQUATION 8-1 8-2 median age, median town income, and group or Dependent Income/ Income/ institutional population. The size of the town was variable sq. Meter sq. Meter also included as a factor, since larger towns are likely Constant -11.798 105.05 to have higher housing costs and average income (-1.59) (4.55) levels. People living in group or institutional housing Housing .008 are most likely to be college students, prisoners, or Density (22.69) residents of group homes, shelters, or halfway Town .0001 .0001 houses. Group housing is expected to have a population (1.46) (2.25) Index crime rate .0001 -.002 negative effect on income density, particularly with (town) (.454) (-2.27)
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% in -.302 -.334 with the full sample, housing density has near- group housing (3.91) (-2.77) dominant explanatory power in low income Housing -.951 neighborhoods. Controlling for housing density, Occupancy % (-3.20) median income measures are significantly positive. Married .087 -.167 The population in group housing has a significant Family % (1.35) (-1.50) town median .001 .001 negative role, as does the percentage of blacks in household income (4.19) (3.54) most specifications. Crime has an insignificant % black -.290 -.191 relation to housing density in all specifications. (-5.04) (-1.92) Along with its mixed significance for the total Number 347 347 sample, one can reject the existence of any Adj. R2 (.635) (.110) relationship between income density and crime for *t-statistics are in parentheses these small towns. Overall, low income Table 9: Income Density Regressions for Low neighborhoods behave much like average Income* and Poor** Block Groups neighborhoods with regard to the determinants of income density. EQUATION 9-1* 9-2* 9-3** 9-4** IMPLICATIONS FOR BUSINESS Dependent Income/ Income/ Income/ Income/ variable sq.Meter sq. sq. sq.Meter OPPORTUNITY IN SMALL TOWNS Meter Meter Constant 21.10 81.18 29.70 73.03 The challenges and issues relating to retail (.933) (2.39) (1.40) (2.28) opportunity in small towns seem to overlap with Housing .006 .006 those of larger cities, but may also involve additional Density (13.05) (11.04) factors. The Boston Consulting Group study for the Town .0001 .001 .0001 .0001 ICIC indicated that retailers‘ major concerns with population (1.29) (2.30) (1.45) (1.19) inner city operations include shrink (shoplifting and Index .001 -.0001 .001 -.001 crime rate (.523) (-.320) (1.07) (-.668) employee theft), area crime or the perception of Housing -.540 -.907 -.693 -.875 crime, greater required flexibility in product lines, occupancy % (-1.87) (-2.05) (-2.64) (-2.17) and employee turnover and qualifications (1998). Married .155 -.016 .243 .171 family % (1.45) (-.100) (2.36) (1.08) The applicability of these issues to small towns may Town .001 .001 .001 .001 differ with the characteristics of the community and median (3.65) (2.40) (2.84) (2.22) its school system. Local crime data is not generally income published by neighborhood or block group, but it is % Black -.375 -.333 -.402 -.288 (-4.48) (-2.60) (-4.21) (-1.97) likely to be locally available. Increased collection of % in group -.346 -.486 -.359 -.380 and access to such data in most small towns will tend housing (-3.04) (-2.79) (-3.53) (-2.43) to alleviate public concerns about crime in central Number 132 132 95 95 neighborhoods. In general, these towns have 2 Adj. R .633 .120 .629 .120 significantly lower crime rates than those of major * household income < 75% of the county median cities, even in their poorer neighborhoods. For example, Carlisle‘s crime statistics for its low income **block group poverty rate above 20 percent block groups are somewhat higher than the t-statistics are in parentheses. community as a whole for property crime, but lower for violent crime and well below major city crime Table 9 estimates the determinants of income density rates for all categories (Bellinger and Bender, pp. 37- for block groups with median incomes below 75 40). Also, the educational performance in most of percent of the county median and those with poverty the towns in our sample is good, with high school rates greater than 20 percent. In comparing tables 8 dropout rates below 3 percent for 6 of the towns in and 9, one finds minor differences in the results. As our sample, 3 to 4 percent for 4, 4 to 6 percent for 4,
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and over 6 percent for 4 others. The lowest dropout Another relatively direct implication of the income rate was for New Castle Senior High School with 2.1 density concept involves downtown retail space. percent. These are low rates by the standards of most Poor small town neighborhoods, like those in big big city districts, and indicate a relatively healthy cities, are often located relatively close to downtown labor force in terms of basic skills and responsibility.4 business districts. In small towns such business Overall, common social factors related to retail districts are often limited to one or two streets, but efficiency are likely to be far less negative than in the logic of income density may still apply. large central cities. Downtown retail space closer to poor block groups provides access to both consumption spending from Unlike social factors related to retail supply, the poor neighborhood and from downtown traffic geographical and infrastructural factors are likely to flow. This dual use for downtown property can be be far more limiting to retail in central locations. marketed more effectively using local income density Because of the small scale of the towns and information. component block groups analyzed in this paper, the generally competitive income densities of low Other common factors relating to inner city retail income small town neighborhoods may have more may or may not apply in small towns. Minority limited development implications than large inner oriented stores will have significant market potential city neighborhoods with similar characteristics. The in some of the towns in this sample, but not others. often limited availability of land, particularly in large Low income block groups have average African- parcels, the relatively small neighborhood customer American population ratios of at least 20 percent in base, and the relatively short distance to peripheral McKeesport (29 percent) and New Castle (20.1 big box retail outlets may limit the range of percent), and between 15 and 20 percent in development options available to these Williamsport, Beaver Falls, and Johnstown. Other neighborhoods. towns in the sample have relatively small minority populations and less opportunity for minority- However, as with larger cities the finding that income oriented retail stores. density is often greater in low median income neighborhoods does have some positive implications Other aspects of small towns are likely to limit for retail and service firms. High income density business development options in or near poor directly affects the viability of small scale retail and neighborhoods. The average block group in this service firms such as convenience stores, specialty sample covers about 0.65 square miles, and at least retail outlets, bank branch offices, and individual half the towns in the sample have 3 or fewer block financial or medical services. These smaller retail groups with near-poverty median household incomes, and service outlets survive in most places because of so the poor neighborhoods may not have the potential their greater access to neighborhood customers, to support medium to large retail firms. Also, high rather than through cost or variety advantages. housing density generally means that land for larger Information regarding income density could prove scale retail or manufacturing development may not be persuasive in attracting such businesses to centrally available. Finally, most of these communities have located or poor neighborhoods. peripheral strip malls or big box retail outlets, and the commuting distance from anywhere in town to these retail stores is relatively small. The major questions to be asked by any town involve the availability of 4 Data on dropout rates are available at the relatively large tracts of land within the town, traffic Pennsylvania Department of Education‘s web site: http://www.pde.state.pa.us/k12statistics/lib/k12statist flow, crime rates and perceptions of crime. ics/0203PubSecSchDropsbySch2.pdf . Dropout rates are for the towns‘ senior high schools CONCLUSION rather than for the school district as a whole, since several districts average middle and high school rates The missing link in the analysis of income density in in producing their total figures. a small town context is a detailed and comparable
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business location measure with which to judge the density patterns in small towns might provide some degree to which central small towns are underserved of the initiative for neighborhood and downtown by retail establishments. Such data is available by zip development that it has done in major cities. code, but in the smaller towns in this data set one zip code is likely to cover the entire area of the town or REFERENCES more. Business data for single zip codes is limited to Bellinger, William and Timothy Bender, eds., ―A general categories of establishments, and the small Review of the Hope Station Opportunity Area: distances involved do not capture the full market area Problems, Progress, Policies, and Prospects,‖ July for small towns. 2003. However, within even small towns distributive issues Boston Consulting Group, ―The Business Case for exist, most commonly in the form of relatively Pursuing Retail Opportunities in the Inner City‖ unhealthy downtown business districts with June, 1998. insufficient demand. The mismatching of demand and supply is likely to be more subtle in situations http://www.icic.org/Documents/pdf_2_The_Business where downtowns do not include local conveniences _Case.pdf for nearby residents. Overall, the results of this study indicate that low income and poor neighborhoods in Davis, Lorn and Anne Habiby, ―Opportunities for Pennsylvania‘s small towns have income densities inner-city and retail investment and services.‖ which are essentially equal to those of seemingly Commentary, (Winter 1999). more prosperous communities, and are likely to Ende, Jean. ―Ethnic Mix Buoys Local Retailers.‖ provide undiscovered business opportunities for Crain‘s New York Business, v. 17, No. 16 (April small scale retail and service firms within low 2001). income neighborhoods or in nearby downtown business districts. Retail opportunities may be Dorrel, Jane H. ―Retail: Respect at Last?.‖ Mortgage limited compared to large inner city areas by the lack Banking, v.63, no. 5 (Feb. 2003).Initiative for a of available land and easier access to big box retail Competitive Inner City web site: stores, but problems such as crime, tax burden, and labor force quality may be smaller than in many large http://www.icic.org/vsm/bin/smRenderFS.php?PHPS cities. ESSID=ab56391b6cf3958b154c7e51e23548a8&cerr or= This study attempts to answer an important preliminary question in small town development, but Poorvu, William J., and Jeffrey L. Cruikshank, The others remain. For the most part issues such as Real Estate Game, (New York: The Free Press, crime, land availability, traffic flows, and ethnic 1999). product demand must be answered on a town by town basis. My hope is that the awareness of income Porter, Michael. ―The Competitive Advantage of the Inner City‖ Harvard Business Review, v. 73 (May- June 1995), pp. 55-71
William Bellinger is an associate professor of economics at Dickinson College.
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Table 6: Income Density and Median Income Crosstabulations by Town
Place Median Income Above Avg. Median Income Below Avg.
Inc. Density Inc. Density Total Inc. Density Inc. Density Total Below Avg. Above Avg. Below Avg. Above Avg. Beaver Falls 4 4 8 5 4 9 Carlisle 5 2 7 4 4 8 Chambersburg 6 6 12 1 4 5 Columbia 2 1 3 2 2 4 Gettysburg 4 3 7 1 2 3 Hazleton 9 15 24 5 3 8 Johnstown 14 12 26 4 4 8 Lebanon 18 5 23 7 9 16 Lewistown 4 1 5 2 4 6 McKeesport 4 5 9 8 6 14 Meadville 11 5 16 4 4 8 New Castle 0 7 7 6 1 7 Pottstown 9 2 11 3 7 10 Pottsville 8 4 12 2 2 4 Uniontown 7 7 14 5 6 11 Williamsport 17 16 33 6 7 13 Total 128 100 228 69 73 142
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FANTASY SPORTS AND SPORTS MARKETING James Talaga, La Salle University Christopher Orzechowski, Cardiology Consultants of Philadelphia
ABSTRACT
Despite the fact that fantasy spots has become a relatively large and popular industry, little academic research has yet been done about the industry. This paper addresses three issues: the demographics of fantasy sports, the impact of fantasy sports on fan behavior, and the relationship between fantasy sports and gambling. The demographics of the participants are consistent with other non-academic studies – young, white, male-dominated. Participation leads to increased interest in sports, and can lead to mixed team/player loyalty. Participants do gamble on fantasy sports, but believe that gambling on fantasy sports is somehow different from other forms of sports gambling. Implications are presented for five groups of organizations local sports teams; national sports associations; internet firms and advertisers; local and mass media; and, regulators.
BRIEF DESCRIPTION OF FANTASY SPORTS For some, gambling is also a major reason to play fantasy sports. Fantasy sports provides unique and The basic concept of any fantasy sport is that each interesting ways to place wagers on sports, as player in the league has to create a simulated opposed to the simplicity of just betting on which "fantasy" roster of players from the real leagues. team will win a game or on the line given by a Las Points are amassed based on the real stats of the real Vegas sporting book. In addition, people who players. For example, in a fantasy hockey league, a gamble on fantasy sports may believe that they are goal scored by a real player in a real game may be more likely to win. Because they are able to choose worth 2 fantasy points, and an assist may be worth 1 and manage their own team, they may have the fantasy point. Winners are determined by whose perception of more control over outcomes. fantasy team was able to accumulate the most points. There are countless variations of ways to run a THE LITERATURE OF FANTASY SPORTS fantasy sports league by changing the way points are awarded, the length of a fantasy game (could be as As an academic subject, fantasy sports has not yet short as one real game or as long as a whole season generated a great deal of interest. For example, in a of real games), and by changing various options that recent search of the literature, of the 719 articles are typical of most online fantasy sites (trade about fantasy sports, there were three from deadlines, free agency, and other options that make academic/scholarly journals. An anonymous article in the game seem more real). the San Diego Law Review (2002), notes that although gambling takes place in the fantasy sports Fantasy sports can be played by keeping track of leagues, there has not been prosecution for violation players and statistics with a paper and pen, a of local gambling ordnances. computer spreadsheet, or most commonly, through one of the many websites that provide fantasy sports In Bernhard and Fade (2005) focused on gambling in services (e.g. ESPN.com or yahoo.com). Websites ―rotisserie‖ baseball leagues and based on qualitative seem to be the most common because of their research conclude that the level of gambling is non- convenience and since, in many cases, they are free trivial. In addition, they present views about the to join and play. Because of this, many fantasy sports positive and negative aspects of participation in participants will join random leagues and play against fantasy baseball leagues. people unknown to themselves.
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Finally, Davis and Duncan (2006) looked at gender the types of fantasy sports players, such as how many roles and participation in fantasy sports leagues and fantasy leagues they typically play through the course concluded that participation in such leagues of a year and what method do they use to conduct reinforces traditional males roles that are developed their leagues, and so on. In addition, this information through sports. serves as a validity check on our sample.
Caskey (1997) did a masters thesis in which he The second main objective that we wanted to achieve examined the then new area of internet sports sites. was to find out if fantasy sports affect people‘s In 1996/1997 although there were a number of on- attention to real sports to any degree. Examples of line fantasy sports sites, the owners of the sites this kind of question included amount of time spent expressed strong beliefs that the sites would become watching sports on TV or listening to it on the radio profitable, although many at that time were not. From or if fantasy sports has ever influenced a person‘s the perspective of 2007, the study is interesting now decision to buy a ticket to a game. Changes in fan from a historical standpoint, particularly from the behavior can have implications for team owners, early evolution of the fantasy sports sites (for managers and players. example, in 1996/7 few sites charged users, although many indicated an inclination to do so in the near The third main objective was to examine gambling future. issues involved with fantasy sports. We wanted to find out if people who gamble on fantasy sports There have been two theses that relate to fantasy perceive it as being different than other sports sports. Caskey (1997) did a study of internet sports gambling. We also wanted to get an idea of what sites. In 1996/1997 although there were a number of percentage of fantasy sports participants actually on-line fantasy sports sites, the owners of the sites gamble on fantasy sports. expressed strong beliefs that the sites would become profitable, although many at that time were not. From METHODOLOGY the perspective of 2007, the study is interesting now In order to learn more about fantasy sports, a survey from a historical standpoint, particularly from the of fantasy sports players was conducted. The survey early evolution of the fantasy sports sites (for consisted of 33 close-ended questions. The survey example, in 1996/7 few sites charged users, although was created using WebSurveyor® software. many indicated an inclination to do so in the near future). The original intent was to obtain an e-mail list from a Levy‘s dissertation (2005) about the sociological website that provides fantasy sports, such as make-up of fantasy sports participants focused more espn.com or yahoo.com. However, after contacting on the nature of the participants rather than the nature several online fantasy sports sites, it was realized that of fantasy sports. this approach was not viable. It was decided to post the link for the survey on message boards on the sites The published literature for the most part does not that had been contacted so that participants could address managerial issues regarding fantasy sports, simply read the message board and take the survey if but has more of a pure descriptive focus. they wanted.
There were three main objectives that we wanted to The survey was online for just over two weeks. In achieve. The first was demographic information. We all, 95 people responded to the survey. wanted to include demographic questions in the survey in order to get a better idea of what kind of FINDINGS people play fantasy sports. Examples of some of the Demographics of Participants demographic questions had to do with income levels, education levels, and ethnicity. As a sub-objective of Participants of this survey were asked a series of this section, we wanted to find out information about demographic questions at the end of the survey. The
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purpose of these questions was to get a better idea of The second most common response was an annual what type of people typically play fantasy sports. household income of less than $15,000, accounting This information would be valuable to fantasy sports for 20.7% of respondents. It is possible that those providers on the Internet because it would give them living at home may have included parental income as a better idea of where they should advertise their part of household income, thus giving an upward site(s). It would also help them choose companies income bias to the results. Alternatively, it may be that might desire to advertise on their websites. If that playing fantasy sports is an upper income they are able to attract a large number of users, then activity, with players being on average more literate they may be able charge a higher price for advertising and numerate. Given the demographics of the typical on the site. fantasy player, it is no surprise that advertisers are moving in this direction The average respondent was 28 years old, but the range of ages was from 16 to 50. Males clearly Participation Patterns of Respondents largely outnumbered the females, making up 91.1% of the respondents. Though surprisingly, females Participants of the survey were asked several were a larger percentage of respondents than we questions about the characteristics of their would have anticipated. Fantasy sports appear to be participation in fantasy sports. These questions dealt as male-dominated as is sport watching. with things such as the number of fantasy leagues in which they play, what method they use to conduct The most common answer to the marital status play, and how many hours they spend researching question was ―never married.‖ There are several information to use in order to make fantasy sports reasons that this was the most common answer. decisions. Since the mean age of respondents was around 28 and the mode was 22, many of the respondents just Number of Leagues per Year are not old enough to have been married. It is also On average, respondents participated in more than 6 possible people who are single have more time on leagues per year. This is somewhat skewed by a few their hands, and therefore, have more opportunity to respondents who participate in a large number (20 or compete in fantasy sports leagues during their free more) leagues per year. Sixty percent compete in time. three or fewer leagues per year. Four-fifths of respondents have either attended, are Hours Spent Researching Fantasy Sports. attending or completed college. Like sports Respondents to the survey spend about 5 1/2 hours watching, participants of fantasy sports vary across per week researching fantasy sports on average. A the board in terms of education level. And although few respondents spend large amounts of time (20 there was only one respondent who answered ―less hours per week or more) on research. Slightly over than high school,‖ this could be due to the fact that half spent 2 or less hours per week researching the survey was conducted through message boards fantasy sports. online. Children may be restricted by their parents from communicating to strangers through this Most Useful Source of Information medium. By far, the Internet is the most useful source of In terms of income, 41.4% had annual household information for people who play fantasy sports. incomes of over $75,000. According to the Internet Eighty percent of respondents stated the Internet is research firm ComScore Networks, online sports the most useful source of information. Presumably, fantasy players are younger and more educated than since the respondents play fantasy sports online, they typical online users, and are 45 percent more likely to have immediate access to the information they desire have household incomes of more than $100,000 to play in the leagues. The second most commonly (Tedeschi, 2004).
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cited source of information was other people (such as result of playing fantasy sports. Most did not change other players in the leagues). reading behavior (53.8%). The remainder (45.1%) claimed to read more about sports as a result of Money Spent on Fantasy Sports Leagues playing fantasy sports. These are not surprising findings. Some websites that provide the capabilities to play fantasy sports charge a fee for participants. Just Fantasy Sports’ Effect on Excitement Level under 30% responded that they spend $0 to play fantasy sports through the course of the year. Thus On average, respondents find that watching sports on 70.8% of respondents pay a fee for playing fantasy TV or listening to them on the radio are more sports. Of those who pay, they paid on average $169 exciting when they have some sort of fantasy stake in to play over the course of a year or about $14.00 per them (mean = 5.74 on a 7 point scale, where 7= far month. more exciting). The excitement level may increase since each play that involves one of the players that Method Used to Conduct Fantasy Sports has been chosen for the fantasy team becomes more The most common responses to this question were meaningful, and therefore, the end result of the game ―online through yahoo.com‖ and ―online through is not always or the only important aspect. espn.com.‖ The percentage of respondents that gave Fantasy Sports’ Influence on Buying Tickets and these answers was 42.1% and 40%, respectively. Memorabilia Overall, only 10.6% of respondents said that they Playing fantasy sports do not seem to have a huge conduct their fantasy sports by some method other influence on people buying tickets to sporting events. than an online site. 7.4% of respondents said that The majority of respondents, 82%, said that fantasy they use the paper and pen method in order to play sports ―has had no influence on me buying a ticket fantasy sports. either way.‖ Almost 16% noted a positive influence, How Fantasy Sports Influences Attention to Real with 3.2% saying that fantasy sports have definitely Sports. caused them to buy a ticket to a sporting event. Only A second objective of this survey was to discover if 1.1% said that they have definitely caused them not playing fantasy sports has an impact on the fan‘s to buy a ticket. attention to real sports. That is, does playing fantasy Fantasy sports also do not seem to have a large effect sports influence the amount of time that people spend on buying sports memorabilia. 82.1% of respondents watching sports on TV or does playing fantasy sports said that fantasy sports have had no influence on influence decisions to buy tickets or sports them ever buying sports memorabilia. 8.4% of memorabilia. respondents did say that a fantasy sport ―has had a Influence on Time Spent Watching, Listening and positive influence on me buying sports merchandise,‖ Reading about Sports and 4.2% said that a fantasy sport ―has definitely caused me to buy sports merchandise. Therefore, No respondent claimed to spend less time watching sometimes fantasy sports do have a positive effect on sports on TV as a result of playing fantasy sports. sports merchandise sales, but most people are not Almost two-thirds (64.5%) claimed to spend either influenced in this manner. somewhat more or a great deal more time on watching sports on TV. A few respondents (3.3%) Fantasy Sports’ Effect on Team Loyalty claimed to spend less time listening to the radio as a Just under half (51.1%) of respondents said that result of playing fantasy sports. Most (83.5%) did fantasy sports have ―never‖ caused them to root not change listening behavior. The rest (13.2%) against one of their favorite teams. However, this increased their radio listening behavior. Only one means that 48.9% of respondents have rooted against respondent claimed to read less about sports as a
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one of their favorite teams due to a fantasy sport. which means the respondents, on average leaned Now, 25.6% only do this ―rarely‖ and 15.8% do this slightly more towards agreeing with this statement. ―sometimes.‖ Fewer than seven percent of 17.8% of respondents strongly agreed with this respondents said that they root against one of their statement, which means that they perceive gambling favorite teams ―often‖ or ―always‖ due to fantasy on fantasy sports as being different than placing sports. Vegas bets or other forms of sports gambling. The most common response was ―5,‖ which means that Gambling and Fantasy Sports the largest group of respondents thinks that gambling on fantasy sports is only slightly different than other Participants of this survey were asked several forms of sports gambling. questions about their opinions about their involvement with gambling in conjunction with Frequency of Other Forms of Gambling fantasy sports. Examples of questions in this section are whether or not they have ever gambled on fantasy Respondents were asked: ―How often do you gamble sports, and if so, how much they have risked. on sports other than those made in conjunction with Gambling is so closely connected to sports that it fantasy leagues?‖ Surprisingly, only 2.2% of would seem reasonable to expect it to become a part respondents said that they ―always‖ partake in other of fantasy sports as well. We note in particular that forms of sports gambling. 34.4% of respondents the complexity of many of the fantasy leagues may ―never‖ gamble on sports outside of fantasy sports. add to the excitement and thrills that gamblers get A cumulative percent of 68.9% of respondents either when they risk money. gamble on sports ―rarely‖ or ―never.‖ With so many people gambling on fantasy sports, we would have Level of Gambling on Fantasy Sports expected more people to participate in other forms of sports gambling. Nearly two-thirds of respondents said that they have gambled on a fantasy sport. This means that most DISCUSSION people that play fantasy sports not only enjoy the fun Demographics of Participants of merely out strategizing opponents, but they also play in the hopes of receiving a financial pay-off. Age information shows that fantasy sports are not 34.4% of respondents claimed that they never just something that young sports fans play. It is an gambled on fantasy sports. entertainment activity that spans from the young to the old. When asked how much they had risked on fantasy sports, ninety percent claim to have risked something The gender information is probably fairly close to the (as contrasted with the previous question where one- national percentages. It is quite possible that roughly third claimed not to have gambled on fantasy sports). 90% of people, who play fantasy sports, are male. Of those who gambled, just under half (48.2%) have Watching sports is a male-dominated activity for the risked less than $20.00 on fantasy sports. Just over most part so it is logical that playing fantasy sports one-third (36.2%) have risked more than $50 on a would skew that way was well. fantasy sport. A fair number (15.3%) have risked over $100. It is difficult to say whether or not the marital status information is close to the national average. There Perceived Difference in Fantasy Sports Gambling were definitely more ―never married‖ responses because the convenient part of the sample was mostly Respondents were asked "How strongly do you agree college students. However, it still may be true that with the following statement (7 being strongly agree roughly 70% of all people, who play fantasy sports, and 1 being strongly disagree): Gambling on fantasy are single because of the free time that is associated sports is not the same as other forms of sports with this lifestyle. gambling." The mean for this question was 4.39,
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The education level information, though skewed websites give out prizes to the people who do the best towards college respondents, did show that fantasy in their fantasy leagues. This allows the websites to sports are played by people with all sorts of education increase traffic on their sites, which in turn, allows levels. ―Less than high school‖ respondents were them to charge more for advertisements. probably underrepresented merely because the survey was posted on message boards, which children may How Fantasy Sports Influences Attention to Real Sports. not have had permission to access. This group may also be underrepresented due to the fact that most This part of the survey and the resulting data shows a fantasy sports are played on the computer. Older number of interesting things. To start, it seems that people, who may have never received a high school playing fantasy sports may increase the amount of education, may not play fantasy sports because their time that people watch sports on TV. There is income level does not afford them a computer, which probably a combination of reasons that this is so. also would have restricted them from taking this The first is that people may watch more sports on TV survey anyway. in order to become more familiar with players and leagues in general. By doing this, they can gain more The household income level information is further sports information and knowledge in order to be proof that people of all backgrounds play fantasy more competitive in their fantasy sports league or sports. The main reason that fantasy sports are leagues. They also may merely be watching more played by people of all income levels is because of sports on TV because they want to see their fantasy three things. The first is that most households have players actually play. Whereas before fantasy sports, computers now. The second is that many websites a person may have only watched their favorite team now provide fantasy sports because of their play, now they are paying attention to other games popularity. The third is that many of these sites because they have some sort of stake in them, no provide them for free. This results in people of all matter how minute it may seem. income levels being able to participate in fantasy sports. Reading about sports has also been affected by fantasy sports. This is probably true because people Fantasy sports are an Internet-dominated activity. want to keep up on their fantasy players as much as The Internet is both the place where most people get possible. Therefore, they may read that extra article their fantasy sports information and where they play in the morning paper that they would have previously their fantasy sports. The main reason this is so is just given a glance. In addition, there are actually probably because of the convenience of doing so fantasy sports magazines made by some companies, through any number of fantasy websites. and some people must be buying them. As for the other medium included in the survey, radio does not In addition, this information shows that although seem to be as greatly affected. Radio is probably not most people spend only a few hours a week play a affected because it has become an outdated media of couple leagues per year, there are a fair number of sorts. With the progression of technology and people who spend large amounts of time playing imagery on TVs, practically no one listens to sports many leagues per year. This borderline obsession is on the radio anymore unless they are in their car. probably a result of the combination of two things. The first is what would seem to be a natural According to this survey, fantasy sports also have a correlation between being an avid sports fan and great effect on the excitement level of watching being a fantasy sports fan. Fantasy sports allow sports on TV or listening to them on the radio. This obsessed sports fans to keep track of all their sports is mainly due to the fact that every play becomes and have fun at the same time. The second reason meaningful. A basketball game could be a complete why some people spend a large amount of time on blowout, but if one of your fantasy players has a fantasy sports is because some of the fantasy sports chance to score a basket at the end of the game, you
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are definitely going to keep watching. And that is Three respondents actually said that they have placed what happens with a meaningless play. In situations more than $500 on a single fantasy sports league. that actually matter, your excitement has to go up Bernard and Fade (2005) also claim a non-trivial because of your additional, valued interest in the level of gambling on fantasy baseball, although their game stats. findings seem to based more on anecdotal records rather than the results of a survey. The reason that so Fantasy sports do not seem to have a large influence many people bet on fantasy sports is probably in sales of sports tickets or memorabilia, though they because fantasy sports gives off the illusion of do have some. Most people claimed that fantasy control over the outcomes, assuming you know (or sports have never influenced them positively or think you know) a lot about sports. Participants who negatively in a decision to buy tickets or think that they know more about sports than everyone memorabilia. Except for a couple who said that else in the league are more likely to feel as if there is fantasy sports were a negative influence, all of the no way they will lose. Such surety of outcomes may other responses said that fantasy sports have either reduce inhibitions about gambling. We note that positively influenced them to buy a ticket or everyone else is probably thinking the same thing, memorabilia or definitely caused them to do so. This and it all becomes a toss-up once the season starts means that although fantasy sports do not have a because of injuries, failures, and flukes that happen huge influence on these sales, whatever effect it does every year in every sport. have is basically a positive one. There does not seem to be any great links between Finally, fantasy sports seem to be such a valued education level and the highest amount that a person activity that roughly 50% of participants actually root has gambled on a fantasy sport. The only noticeable against their favorite teams as a result of playing trend is that people with graduate school experience fantasy sports. The degree to which they do so is are more likely to place larger bets since two of the probably associated with how many leagues they three people, who said that they have placed $500 or actually play, which would increase the amount of more on a fantasy sport, were in this group, and only times where there may be a conflict as to what you two people in this group said that the most they have want to happen so that it causes a positive effect for risked was $20 or less. Otherwise, people from all of your fantasy team and what you want to happen so the other education levels vary on what amount is the that your favorite team does well. However, most they have risked on a single fantasy sport, responses to this question varied across gender lines. except for the ―less than high school‖ group, which Only one female respondent said that a fantasy sport only had one respondent. Income level does not ever caused her to root against her favorite time, and seem to have a huge effect on the amount risked she said that this rarely happened. Males seem to be either. Though noticeably, no one from the two much more likely to let their fantasy sports influence lowest income levels placed any bets of more than what they want to happen to their favorite teams. $100. However, two of the three people, who bet over $500, were from the middle income level of this Gambling and Fantasy Sports survey. Though not an inherent part of playing fantasy sports, Respondents typically felt that playing fantasy sports gambling almost inevitably becomes a part of will not lead to any kind of sports gambling anything that is sports-related. This survey shows addiction. Only three people strongly agreed that that this is true. Nearly two-thirds of all respondents fantasy sports could lead to gambling addictions, said that they have gambled on fantasy sports. What while 18 people strongly disagreed. The reason that could simply be a leisure activity to enhance the respondents probably thought this is because entertainment value of sports is much more important respondents believe that betting on fantasy sports is to some of these gamblers. And these are not always different than other forms of sports gambling. The trivial wagers just to make things more interesting.
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respondents generally felt that betting on fantasy players, there is likely to be contractual impact, in sports is slightly different than other forms of sports that as the popularity of the players increase, such gambling. If this is what they actually think, then it increase will be likely reflected in the negotiation makes sense that they would believe fantasy sports stance of the player. Since an actual team wins and would not lead to gambling addictions because the loses on the basis of team performance, it is in the two are separate in some perceived way. Even interest of local team managers and players to create further proof of this slight separation between and play on well-balanced teams. However, since a gambling on fantasy sports and other forms of sports fantasy team wins or loses on the basis of the gambling is the fact that only 2.2% of respondents aggregation of disparate individual performances of said that they always partake in other forms of sports individuals, the interest of the individual player may gambling, while nearly 70% of respondents said that take a subtle shift from team performance to they either never do or rarely do. The reason that individual performance. people, who bet on fantasy sports, do not typically engage in other forms of sports gambling is probably Local sports teams may be able to capitalize on the because fantasy sports add a different element of fun. popularity of fantasy sports by integrating fantasy Whereas people betting on the simple outcome of a sports into their own websites. People in the local game will not be happy if they do not win, fantasy area may be willing to play their fantasy sports on a sport gamblers can still have fun managing and local team‘s website because they would be able to organizing their fantasy team even if they do not win play against other local fans. If this actually worked the bet at the end of the season. It is also possible that for the website, they would be able to increase their the control elements is present here also. That is, site traffic and improve their advertising profits as while I cannot control the outcome of a real New well. York Yankees game, I can control the outcome (to an National Sports Associations extent) of my own fantasy team. And since the fantasy sports service is provided for free on so many National Sports Associations such as the NBA, MLB, websites, people do not have the hesitation that NHL, and so on, would seem to generally benefit comes with the question of where to put more money from fantasy sports since playing fantasy sports into the hobby. The gambling money is typically the increases interest in all teams and the results of all only money that is involved. contests. As a result, it would appear that the sport in general would benefit. Thus, sponsorship of Fantasy MANAGERIAL IMPLICATIONS Leagues and other actions to promote fantasy sports At least four groups of organizations need think would seem to be in the interest of the National about the implications for themselves. These Associations. include: local sports teams; national sports associations; internet firms and advertisers; local and Mass Media mass media; and, regulators. Mass media, if it wants to reach the fantasy sports Local Sports Teams players, would need to increase coverage, including more detailed information, about the performance of The picture here is not clear. Of benefit to the local individuals as opposed to increasing coverage of teams is the generally increased interest in the sport team efforts. that fantasy sports creates – hence there should be some spillover to every local team (as long as that Regulators local team has players that are believed to be Regulators may have a more difficult time detecting desirable to players of fantasy sports. However, it cheating. If the level of gambling increases (as should be noted that as methods develop to track the would seem likely) and the quantity and quality of relative importance of sports stars to fantasy sports information about fantasy sports increases, gamblers
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and those who run gambling will be able to estimate demographics are probably also hard to change, the value of a given play or action of a given player. though it is doubtful that the results of this survey Thus, gambling profits can be directly made on the match the actual demographics of fantasy sports basis of performance of a single player on a team on participants throughout the United States. Therefore, any given play. Detection of attempts to product the goal of any company in the sports entertainment abnormal gains from deliberate bad performance is industry should be to continue focusing on males in likely to be more difficult. all of their advertising, whether it is on TV, the Internet, a fantasy program, or something else. This The overall conclusion of this report is that fantasy target demographic will never change. sports help the sports entertainment industry. They increase attention to sports. They make sports more REFERENCES exciting to watch. They even influence sales of ticket Anonymous (2002) ―Internet Gambling: Should and memorabilia to a small extent. Therefore, it is fantasy sports leagues be prohibited?‖ The San Diego necessary for all companies and organizations Law Review, Winter, v. 39, n 1, p. 201 involved with professional sports to work with this trend and use it to their advantage. In no way are Berhhard, Bo J. and Vincent H. Fade (2005) fantasy sports diverting attention from real sports. ―Gambling in a Fantasy World: AN Exploratory Since they are based on real sports, they are only Study of Rotisserie Baseball Games,‖ UNLV enhancing attention. The marketers for the big Gaming Research & Review Journal, v 9 n 1, pp. 29- companies have already realized this, and some of the 42 smaller, more local companies should follow suit. Caskey, Robert J. (1997) ―An Examination Of The The Internet is the choice for fantasy sports and Attitudes Of Sports Marketers Toward The Use And fantasy information. It is convenient, accurate, and Viability Of The World Wide Web As A Profitable simple, no matter what website is used. And that is Tool For Marketing Sports,‖ unpublished masters why a marketing shift towards the Internet has thesis, The George Washington University. occurred and will continue to do so. http://www.angelfire.com/va/websports/images/webs ports.pdf According to this study, people play fantasy sports across all income levels, education levels, and ages. Davis, Nickolas W. and Margaret Carlisle Duncan The discrepancy lies in the gender demographics and (2006). ―Sports Knowledge is Power: Reinforcing the ethnicity demographics. The gender Masculine Privilege Through Fantasy Sport League Participation,‖ Journal of Sport and Social Issues, demographics are probably always going to be August, v 30, n 3, pp. 244-264 heavily skewed towards males because that is how the sports industry typically is. There is almost Levy, Donald P. (2005) , ―Sports Fanship Habitus: nothing that the sports industry can do to increase the An Investigation Of The Active Consumption Of popularity of sports with women other than offering Sport, Its Effects And Social Implications Through more family deals for sporting events and programs. The Lives Of Fantasy Sport Enthusiasts‖ unpublished It is highly doubtful that this will ever increase the Ph.D. dissertation, The University Of Connecticut popularity of fantasy sports with women, and therefore, it will not cause women to watch more Tedeschi, Bob (2004, ―Advertisers discover the value sports on TV or visit sports websites more often. of young men with time and money to spend on This just is not going to happen. Ethnic fantasy sports on the Web,‖ New York Times, August 23.
James Talaga is a professor of marketing at La Salle University. Christopher Orzechowski is with the Cardiology Consultants of Philadelphia.
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ARGUABLY, NO ONE KNOWS MORE ABOUT CANDY AND TECHNOLOGY THAN TEENS Arlene Peltola, Cedar Crest College
ABSTRACT
Working with a business partner, a national candy company, Cedar Crest College Marketing professors and students launched iCandy as a pilot Internet contest among area high schools. The contest was managed within the Marketing Practicum course in the Department of Business, Management and Economics of Cedar Crest College. Practicum students helped design this innovative candy contest intended to promote marketing as a career and field of study among high school students. Cedar Crest College and Just Born, Inc., maker of Peeps®, Mike and Ike® and Peanut Chews®, teamed up to invite area high school teens to explore their creativity, learn about and submit a storyboard using emerging Internet marketing applications, and compete for prizes. The students had free rein with the product development concept; they were able to change the brands they were assigned in terms of function, shape, color, flavor and texture. Each competing teen team designed either a Web site or a viral execution to communicate the Brand essence to the target audience. Because of the success of the pilot year, the program is being evaluated for global launch so that teens from different cultures, languages and creative approaches can be included.
INTRODUCTION Teenagers are using technology at a younger age to connect with more people, according to Forrester Teens chat online, buy online, learn online and listen Research (December 2005), Cambridge, to music online. Katie Peters is 17. With the Massachusetts, confirming that youths are more tech- exception of sleeping, she‘s on her Mac and Sidekick savvy and communications-oriented than ever before. more than she is not. She just bought tickets for a They are the first generation to have mobile phones “Brand New” concert in Philadelphia via her mobile with cameras and movie and TV broadcasting and phone and texted a group of five friends that she touch screen Internet capability. As of April 2006, snagged them on eBay. They chat for a few minutes, 45% of US teens had a cell phone and 87% had and Katie moves over to Facebook to post a comment online access (Dealerscope, April 2006). This usage on Cali‘s wall. She gets poked and smiles at the is predicted to grow rapidly; Salt Communications application Cali sent back; she got trout slapped. (January 2007) estimates that 90% of the world‘s She‘s tossing jelly beans into her mouth with a free population will have access to mobile networks by hand, and all this time she has a television on mute the end of the decade. playing old ―Friends‖ episodes and listens to Dave Matthews on iTunes. At the same time we see evidence that teens and technology are connected and have forward If it sounds as if this average day can cost some momentum; we also find that teens are primary money, you‘re right. The market for products bought consumers of another category in a growth stage: by and for the 26-million-member teen market will candy. Teens are heavy users of the snack and undergo a slight growth spurt, increasing from $190 confection category. According to the Washington billion in 2006 to $209 billion in 2011, despite an Times (March 2007) children and teens influence estimated 3% decline in the 12- to 17-year-old about $500 billion in annual spending on categories population in that same period (―The Teens Market in such as candy, cereal and fast food. the US‖ report Package Facts).
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In the Food, Drug, and Mass channels, candy and encouraged to use their own language and gum rank third in food categories behind carbonated inspirations. They were encouraged to take cell beverages and milk. Table 1 outlines 2006 pictures of other teens eating candy or hanging out confectionery sales, reported by The National Candy and to find out when and why they were snacking so Association, as $28.9 billion dollars, up 2.8% from they could translate the scene onto a storyboard. The the previous year. teens explored the Internet for viral and Web campaigns with the Practicum students. They viewed According to Package Facts, a division of video viral marketing and interactive Web sites marketresearch.com, the prime consumers of featuring Webisodes, along with other holistic chocolate products are young people ages 5-24 years. approaches to Internet marketing. Information Resources, Inc., reports the heavy consumers of non-chocolate candy are teens age 12- The creative process for the teens began with the 17 years and children age 6-11 years (August 2007). exploration of the teen culture and ended with a hands-on application of marketing principles to a Table 1 storyboard. They completed the assignment Summary of 2006 Confectionery Sales independently or with a teammate. This paper reports on the anecdotal and qualitative data used in evaluating the process and the results.
THE BUSINESS CONTEXT
The business context was important to the process. According to Harvard Business Review, Managing for Creativity, page 125 (August 2006), ―A company‘s most important asset isn‘t raw materials, transportation systems or political influence. It‘s creative capital, simply put, an arsenal of creative
thinkers whose ideas can be turned into valuable THE iCANDY PROJECT products and services. Creative employees pioneer new technologies, birth new industries and power The iCandy project is a pilot program designed to economic growth‖ (Florida & Goodnight). promote marketing as a career and field of study among high school students. The Practicum students With creativity and innovation at the core of business at Cedar Crest College leveraged their Marketing growth, consideration was given to changing the course learning as they took on the role of teaching actual product in form, shape or color and to address marketing principles and contest guidelines to the what precisely attracts and engages teens in high school teens. Since the Practicum students were advertising messages. According to Elissa Moses, juniors and recently teenagers themselves, they author of The $100 Billion Allowance Accessing the shared an interest in technology and candy. Global Teen Market, page 182, it is apparent that this Throughout the semester, the Practicum students group of prime candy and technology consumers just modeled their Business course learning as they wants to have fun. The top 10 appeals are ―make me presented training information and interacted with laugh, be fun, use music, be realistic, use young teens. actors, use colors and graphics, use effects, show the product in use, be interesting, and show that the When the teens were gathered for training, the company cares.‖ One of the top 10 advertising trends direction was to go out and think about Mike and in candy, according to the Confectioner Ike® and Peanut Chews® in the context of Magazine.com, page 1, News and Trends (January technology and cultural creativity. The teens were 2007) is that Internet marketing prevails. ―Brand-
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based blogs will become more frequent and Web- 6. The mobile phone transcends economic based marketing initiatives will continue to chip viability. Teens don‘t really want to be away at more classical consumer marketing budgets.‖ without one, so they have one. 7. Mobile blogging is emerging among teens. 8. Teens are providing content without THE QUALITATIVE FINDINGS blinking. Sites like Flickr, MySpace, Facebook, Wikis, Second Life, YouTube, Method craigslist and Xanga are all mainstream. 9. Along with adults, teens are becoming ―pro- Sixty teens were interviewed and then went through a sumers‖ by sharing knowledge, videos, training session in groups of 15 at the beginning of commercials, political statements and other the iCandy project. The top 5 teams, 11 teens in all, resources on open source sites. were finalists in the contest. Of these 11 teens, seven 10. It‘s all about being original, even if you use were interviewed after they received their awards. sponsored applications and existing graphics to do it. It‘s when you use them and how you express yourself that matters. Hypothesis: Teens can produce creative work when 11. Teens are not at all bashful about money and asked to think about specific brands (particularly in a what it can buy. ―Unabashed consumerism,‖ category they are prime users of) in the context of Elissa Moses terms it and ranks it as the technology and cultural creativity. number one global teen unifier. Number two and three are passion for technology and Measurement perpetual entertainment. 12. Teens had no reservations communicating Four judges rated each of the top 10 presentations on their culture (good or bad) in their creative Originality (30%), Overall Appeal (40%) and work. They were at ease with the podium presentation, cameras flashing; they plugged Likelihood to Motivate People to Eat Mike and Ike® in and spoke the word. or Peanut Chews® (30%). Judges completed score 13. There was no apparent gender dominance in cards and handed them to Official tabulators to be collaboration or presenting in male/female compiled. groups. 14. Teens eat candy at any time of the day or Specific Findings night. Teens are online at any time of the day or night. 1. There are definitely cool and uncool words 15. Teens are adaptable. They are living several in the teen vocabulary. While this has centuries of technology each year of their occurred through the ages, it‘s the words lives. Approximately 33,000 products were that are new. Most ―cool,‖ ―now‖ words are launched this past year; they are on top of in some way tied to Internet or mobile the ones that apply to them. communication. Some examples are hard 16. Teens are resourceful; if there were a candy (computer), eFlirt, eCrush, LOL, wiki barrier, for example a blocked site, they got (hurry), cyber ―e‖ or ―i‖ as a prefix. around it. 2. Teens love brand names. They like to see 17. In terms of this contest, teens were inspired their favorite brand names (like, True by the fact that they were competing using a Religion) in songs by popular artists. real creative project that may be used in the 3. Mass appeal is no longer an option. What is marketplace. They responded to the relevant is what happens to them, not others. Practicum students who encouraged them to 4. Among teens, adoption is quick, or quickly have fun with the project via a YouTube and rejected. PowerPoint presentation. They also seemed 5. ―The medium is the message‖ (Marshall motivated by the $1,000 prize structure with McLuhan 1911-1980) still stands; however, a Just Born, Inc., factory tour and a shadow now the medium is all about unique viral day at Cedar Crest College with the properties and electronic social Practicum students. communities.
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RESULTS SUMMARY
The students submitted their contest submissions in The iCandy contest is viewed as a successful pilot August 2007, and the Finalist Live Judging Event project with a national business within the Practicum took place in September. The four Judges included course requirements at Cedar Crest College. It two executives from Just Born, Inc., the Cedar Crest maximized the Cedar Crest College students‘ College Business Chair and the Marketing Director opportunity for professional development and for The Morning Call, the Lehigh Valley newspaper. leadership. The Practicum students were required to Winners were announced at the live judging event provide a debriefing presentation on this assignment and prizes were awarded. to all Practicum students and to The Principles of Marketing class so that the lessons of this assignment The results of the study support the original can be leveraged with current and future students. hypothesis that teens can produce solid work when They were also required to present a final project asked to think about Mike and Ike® and Peanut comparing results to goals to the Marketing Chews® in the context of technology and cultural Department at Just Born Inc. creativity. All of the top entries illustrated realistic scenes in the language of the teen. All the The project was also viewed as successful among the storyboards were meant for the electronic medium of teens who participated in that they were able to take the Web because that is where teens are spending away new learning on the creative process using their time. The teen is capable of providing content to emerging technology and were able to explore what a manufacturers. In the case of a teen-targeted product, career in marketing may include. The top three content was perhaps more relevant than what winners received cash prizes for their schools. The manufacturers can provide themselves contest is being evaluated for a global launch in the coming year. The iCandy project resulted in a robust learning experience for the teens, rich findings and REFERENCES experiences for the Practicum students, and promising creative storyboards for Just Born, Inc. Confectioner Magazine.com (January 2007) News Table 2 outlines the concept that ultimately won the and Trends, 1. contest, ―Men Love Sports.‖ Florida, Richard & Goodnight, Jim (August 2005) Table 2 ―Managing for Creativity‖ Harvard Business Review, iCandy Contest Grand Prize Winner 125. Title ―Men Love Sports‖ Gray, Audrey (April 2006) ―Millennials Rising‖ Brand Peanut Chews® www.Dealerscope.com Volume 48, 35-38. Information Resources, Inc. (August 2007) U.S. The Target 18- to 24-year-old men Market for Non-Chocolate Candy Packaged Facts Viral Execution YouTube Lopes, Gregory (March 2007) ―Children Bombarded The Concept If men want quiet during a game, by Junk-Food Ads‖ Washington Times, 1. buy Peanut Chews® for Moses, Elissa (2000) The $100 Billion Allowance girlfriends Accessing the Global Teen Market, 37, 182. The Personality Unique, social, masculine National Candy Association (2006) US Department The Product The chewy attribute is featured of Commerce Report.
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Packaged Facts (2007) ―Teen Market to Surpass $200 Taylor, Paul (December 2005) ―Teenagers More Billion by 2011, Despite Population‖ Teen Market in Tech-Savvy than Ever Before‖ Financial Times the US Report, 1. London Forrester Research, 4.
Salt Communications (January 2007) ―Media Convergence Today versus Tomorrow‖, 7.
Arlene Peltola is an assistant professor, School of Business, Management and Economics, Cedar Crest College ([email protected]). This research was supported by a grant from Just Born, Inc. The author gratefully acknowledges the Just Born, Inc., Marketing and Corporate Affairs Departments; Cedar Crest Department Chair, Gaetan Giannini; Director of Grants and Institutional Advancement, Dr Marcie Walker, Practicum Students Kara Kaskiw and Kristian Parchinski; and the Teen participants.
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AN EMPIRICAL STUDY OF UNDERGRADUATE STUDENT'S BASIC FINANCIAL MANAGEMENT COURSE ACHIEVEMENT RELATIVE TO STUDENT BACKGROUND AND PREREQUISITE TIMING. Gary Leinberger, Millersville University Douglas Frazer, Millersville University
ABSTRACT
All business curriculums contain a course in basic Finance. This course is often a major hurdle for students because Finance requires a mastery of numerous earlier prerequisites such as accounting, statistics, calculus and economics.
An in-depth study over two semesters of four separate classes was carried out to assess those factors that lead to success in finance. The study is also concerned with evaluation of the present curriculum structure and timing, as well as assessing the value of more detailed record keeping on student achievement.
The results were as would be expected in general, with stronger students doing better than weaker students. However, several interesting results were found. The pre-test showed little predictive power, and the inability of weaker students to ―catch up‖ on prerequisite areas was disturbing, despite the availability of review classes on identified problem areas. As an example, nearly all students were unable to do a yield to maturity bond problem (covered in two earlier accounting classes) in the pre-test, and despite extra classes, and (pre-announced) problems of this type on several quizzes and all exams, a significant number of students were unable to correctly answer a bond problem at the end of the semester.
INTRODUCTION and economic concepts to understand key financial concepts (forecasting, capital budgeting, breakeven, All business curriculums contain a course in basic etc.). All of these areas require a mathematical Corporate Finance or Financial Management. This background that is beyond merely algebraic course is often a major hurdle for students because manipulation. It requires a high degree of Finance requires a mastery of numerous earlier mathematical comprehension to understand complex prerequisites such as accounting, statistics, calculus ideas and relationships in finance. and economics. Students at Millersville University must earn a minimum of a C- in accounting and Identification of prerequisite tools/skills and economics. Finance is a junior level course, required achievement levels necessary for success in finance is as a prerequisite for upper level courses in most critical to aiding students in preparing for their course concentrations. A C- in Finance is required for many in finance and for designing curriculum. By of these upper level courses. In addition, business establishing a baseline of required incoming students must take a course in calculus and a course knowledge, it was hoped to understand the in statistics. These two are not prerequisites for the development of financial knowledge during the finance course, but must be taken as part of the course, and identify key prerequisite skills necessary degree. Most of the students do take these classes for success in Financial Management. prior to taking finance. The study was undertaken to help provide a baseline The finance course requires students to show a of student knowledge entering the finance course, mastery of mathematical modeling using accounting
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and to evaluate the worth of moving to a preliminary course in order to move on to upper level courses in examination for entry into the business major. Finance. This rule is presently being investigated for all upper level classes. This study was also aimed at evaluating our curriculum in terms of student preparedness for upper The breakdown according to concentration differed level courses. somewhat across sections.
Finally, this study was designed to evaluate the worth Majors Business Section Acct. Fin. Inter. Mang. Mkt as Minor Other of detailed record keeping on students to understand 1 1 1 2 4 8 1 2 4 1 1 4 9 trends in learning and to develop tools for 3 1 2 8 6 2 4 3 2 3 5 9 1 documenting student progress. The public and our 9 6 6 21 32 3 1 students increasingly are demanding better support Percentages 11.5% 7.7% 7.7% 26.9% 41.0% 3.8% 1.3% and measurement of the learning process. Pre-Test Data Gathering and Sample The pre-test was administered to all students, who An in-depth study over two semesters of four were given notice regarding this study by e-mail two separate classes (a total of approximately 100 weeks prior to the semester start. They were students) was carried out to assess the effect of earlier requested to bring a calculator to the first day class course work on success in finance. Information on and to be prepared for a test of their background each student was gathered, including GPA, knowledge and the first chapter of the finance text. A prerequisite course results, and timing of prerequisite syllabus was included with the e-mail, and students courses. The course included a pretest given the first were asked to confirm that they had received the e- day, two hourly exams, a final, and numerous mail. A large majority affirmed that they had quizzes. Test and quiz questions were grouped in received the e-mail. terms of area and subject (for example, economics and fiscal policy) and results for every question on The pre-test included basic problems and essays from every quiz and test were recorded. the two prerequisite courses in accounting (financial and managerial), two prerequisite courses in The classes started with 25 students each, but early economics (microeconomics and macroeconomics) drops and later withdrawals reduced the classes. Our and two required business major courses in calculus institution allows students to withdrawal from a class and statistics. Students also were advised that while up until 10 weeks into the semester. Some students calculus and statistics were not prerequisites, it was were not included if they did not provide background assumed that students would have finished their information. All background information was freshmen and sophomore required courses prior to provided by the students, including their grades in taking finance. other courses. The questions were supplied by professors teaching The fours sections differed somewhat in their the prerequisite courses and were designed to be makeup, but generally were fairly homogeneous. rather basic.
# # Cum. Aver. Fin Grade Section Finished used Male Female Average Std. Dev. Aver. Std.Dev The accounting covered basic theory, income 1 22 17 7 10 2.92 0.56 75.12 9.51 2 21 19 15 4 2.77 0.51 69.16 14.52 statement and balance sheets, t-accounts, contribution 3 21 19 10 9 2.75 0.46 76.63 12.34 4 23 23 11 12 2.99 0.57 80.17 9.82 margin, a bond problem, and breakeven. Economics All 87 78 43 35 2.86 0.53 75.53 12.17 Percent 55.1% 44.9% questions included fiscal and monetary policy, how Average CUM 2.79 2.92 2.86 banks affect the money supply, and some basic While the average grade in Finance was a C (75%), multiple-choice questions on economic theory. the distribution was such that 47% of the students in Calculus and mathematics included the graphing of a the two semesters did not earn the required C- in the straight line, derivatives and minimums and
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maximums. The finance questions were on basic classes during their freshman year, and taken the two background from the first chapter, which was required accounting courses during either their assigned for the first day. freshman year or at the beginning of their sophomore year. Calculus was normally taken during their In the spring semester several questions on statistics freshman year or first semester sophomore year, with were included, mainly involving the normal statistics taken during their sophomore year (calculus distribution. Sections 1 and 2 were the fall semester is prerequisite for statistics). The vast majority of the classes, and sections 3 and 4 were the spring semester students were taking finance as rising seniors with an classes. average of 90 credits (out of 120 required for Pre-Test Results graduation) completed prior to the finance course. The pre-test results were as follows. Hence, on average the students had approximately two full years since taking accounting, calculus and First Day Test Results economics and one and one half years since taking Section 1 2 3 4 statistics. Mean 27% 20% 25% 32% Std. Dev. 12 7 11 5 Student Backgrounds Maximum 57% 40% 57% 69% Regressions were calculated on final grades in the Minimum 7% 11% 11% 5% finance class versus earlier academic results. There
First Day Test Fall Sections were no strong results, with pre-testing and prior Percentages Possible and Correct by Area academic performance providing no guidance in 45% estimating student performance in finance. 40% 35% Finance Grade versus: 30%
25% Possible R 20% Correct Average Prerequisite Grades 0.2301 Percentages 15% Accounting Grade 0.2766 10% 5% Calculus Grade 0.3956 0% First Day Test Results (Fall) 0.0182 Acct Calc Econ Fin Math First Day Test Results (Spring) 0.2062 Areas Credit Hours (Fall) 0.2295 Credit Hours (Spring) 0.0148 First Day Test Spring Sections Percentage Possible and Correct by Area Cumulative Average (Fall) 0.0454 Cumulative Average (Spring) 0.5376 45.0%
40.0%
35.0% A typical regression plot looked as follows:
30.0% Finance Grade vs Calculus
25.0% Possible 100 Correct 20.0% 95
Percentages 15.0% 90 10.0% 85 5.0% 80
0.0% 75 Acct Calc Econ Fin Math Stat 70
Areas FinanceGrade 65 y = 0.7773x + 13.991 60 R2 = 0.3956 Prerequisite Timing 55
50 The majority of the students in both semesters were 70 75 80 85 90 95 Calculus Grade traditional students, with an average age of 21.8 years, taking the normal sequence of classes. The vast majority had taken all the required classes. Most Student Throughput of the students had taken the two required economics
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It was noted that the average student had 90 credit As shown by the pre-test the students seem to have hours completed prior to taking Finance. This means entered the course with weak backgrounds in all the average student taking the course is a rising major areas. The question of whether students senior. Finance is suppose to be a junior level course learned anything in the finance course is a reasonable and hence students should have 60 to 75 credits prior one. While all areas cannot be presently evaluated, on to taking Finance. one area, bonds and their pricing, an extensive program of classroom work and testing provides Taking Finance later has two problems: first, the some measure of the learning accomplished in the student is even further away from prerequisite class. Bond pricing and calculation of the market rate courses, and second, in many cases the student does of return on a bond is a basic problem in present not have Finance as a prerequisite when they take value that is taught in both financial and managerial upper level courses. accounting. Present value calculations are a major tool in finance, used in calculations for bonds, stocks, The reason for this late taking of finance is twofold: weighted average cost of capital, and capital first the course is viewed as a difficult course, and budgeting, as well as a necessary theoretical second, the course is difficult to get into as there is background for understanding market actions. such a backlog of students trying to take the course since the throughput is low. A particular student shortcoming was found in the bond area in the pre-test. In the fall semester this was In looking at the grades for these four sections, it covered in the review of the pre-test, in an extra topic becomes obvious where part of the problem lies. review session and during the normal chapter on Present Value in class. The results were not Student Results Fall 2006 and Spring 2007 30 encouraging.
25 No Partial Fully Total 20 Fall Credit Credit Correct Students % Pre-Test 46 2 0 48 0.0% 15 Final 20 0 20 40 50.0%
10 In the spring semester there were similar results on Number of Students Number 5 the pre-test, with one student out of 52 successfully
0 solving the pre-test bond problem. The bond
F D C B A D- D+ C- C+ B- B+ A- problem was covered in the review of the pre-test, Dropped Grade students were told it would be emphasized during the course, a review session outside of normal class was At Millersville students can withdraw from a class up offered, and the problem was covered on the first to 10 weeks into the semester. The classes started hourly, three quizzes and the final. Students were told with 25 students per section, or 100 students. Final the exact nature of the problem. The results were grades were given to 75 students. Hence, out of 100 better but still were not overly encouraging. students, only 75 completed the class and got a grade. Of these 47% got a D+ or lower, which means they No Partial Fully Total must repeat the course before going on to upper level Spring Credit Credit Correct Students % Pretest 51 1 52 1.9% courses. 1st Hourly 16 30 46 0.0% Quiz 1 11 10 20 41 48.8% This means only 53% of the beginning students Quiz 2 12 13 20 45 44.4% Quiz 3 4 6 35 45 77.8% completed this course with the minimum required Final 7 4 32 43 74.4% grade or better. While approximately three-quarters of the students Student Learning in Finance finally learned to do this bond problem, the amount of teaching effort and time was huge, particularly for
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a small area of the course which students had covered hurtles to be passed and forgotten as opposed to in two other classes. Students were allowed to use being building blocks to future success. Changing financial calculators, but my observation was that this culture is a difficult problem, but three potential most students lacked the mathematical skills to set up paths are being investigated. the problem, as well as being unable to use a calculator efficiently. The use of time-series information on individual student accomplishment in particular tools/skills CONCLUSION shows promise as a way to provide feedback for review within the semester, and for counseling This research was undertaken to test how well our students on areas of weakness. It also appears that the curriculum is preparing students for intermediate C- minimum grade should be applied to all courses like finance as well as ultimately for prerequisites as a screening device. It may also be graduation. Several major problems were uncovered. necessary to impose a minimum grade point average First, students are retaining little in the way of higher than the 2.0 required for graduation. prerequisite skills. The pre-test Mathematical skills were particularly weak and certainly not up to any A longer approach is to develop a freshman standard necessary to understanding finance. handbook for business majors that outlines the courses and the particular skills taught, and explains A second problem is that there is too much time how these skills fit in with later courses. The second between accounting and economics courses, and step is to move toward a pre-business major, with finance. These critical courses are now being moved entry into the business major dependent on GPA and to later in the student‘s curriculum to reduce the time successful completion of a rigorous test on all between prerequisites and upper-class courses. prerequisites. Finally there is an effort in the department to have more testing in upper level The final problem evident in these results is that courses on prerequisite material, or review sessions students have a mind set of viewing courses as either in class or on-line to review prerequisite material.
Gary Leinberger is an associate professor of finance at Millersville University. He received his PhD in finance from Oklahoma State University. His other research interests are in small business, Sarbanes-Oxley and curriculum development.
Douglas Frazer is a professor at Millersville University. He received his PhD in Accounting from Temple University. His other research interests are in small business and Sarbanes-Oxley.
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IMPACT OF STRATEGY ON FIRM PERFORMANCE IN AN EMERGING MARKET: AN EMPIRICAL EXAMINATION OF TURKISH INSURANCE INDUSTRY Ilyas Akhisar, Marmara University J Rajendran Pandian, Youngstown State University
ABSTRACT
Strategic group concept has been used in the field of strategic management to understand competitive behavior in industries. In this study, we apply the research methodology used to study the US insurance industry by Fiegenbaum and Thomas (1993) to study Turkish insurance industry. We carry out a strategic group analysis and present our findings. We tested the implications of strategy on performance and found that in most of these tests, strategy had significant impact on firm performance.
INTRODUCTION LITERATURE REVIEW
Since the central issue of interest in Strategic Hunt (1972) introduced the concept of strategic Management is improving firm performance, there groups to explain intra-industry performance have been many streams of research examining the differences that could not be explained by the impact of strategy on firm performance. The stream structure-conduct-performance paradigm. Firms in of research on strategic groups is one such stream an industry that adopt similar strategies form a where the performance implication of group strategic group and the performance differences membership has been extensively in various across strategic groups were significant. That is, the industries. For example, Bogner and Thomas, firm strategy had a direct impact on its performance. (1993); Cool and Schendel (1987) and Pandian, One of the most revered theses in Strategic Thomas, Furrer, and Bogner (2006) examined the US Management is that the strategic choice mattered for pharmaceutical industry and Leask and Parker (2007 firm performance. That is, managers by choosing examined the UK pharmaceutical industry; appropriate strategies could improve the performance Fiegenbaum and Thomas (1993) examined the US of firms. If managers could consciously adapt firm insurance industry; Athanassopoulos (2003) and strategies, then most firms would attempt to choose Lewis and Thomas (1993) studied the UK retail the best performing strategic group‘s strategy and grocery industry and Marlin, Huonker, and completely homogenize the industry. Since Hasbrouck (2004), Marlin, Huonker, and Sun (2002) differences in strategies and performance were and Short, Palmer, and Ketchen, Jr. (2002) observed in empirical studies, Caves and Porter researched the U. S. hospital industry. Most of these (1977) suggested the concept of mobility barriers studies focus on industries in stable environments which prevented firms from moving from one (the USA or the UK). In this study, we examine the strategic group to the other. Lippman and Rumelt Turkish insurance industry and test the impact of (1982) suggested that ‗uncertain imitability‘ could be strategy on firm performance. The rest of the paper another reason for firms‘ inability to change their is organized to provide a brief literature review, strategies (McGee and Thomas, 1986). Though these statement of hypothesis to be tested and the research theoretical arguments support the impact of strategy methodology. Then, the findings of our analysis are on firm performance, the empirical evidence had presented and discussed. The implications for further been inconclusive (Pandian, Thomas, Furrer and research and practice are presented which is followed Bogner, 2006). But, recent studies have suggested a by a conclusion. renewed interest in the concept of strategic groups and its performance implications (Leask and Parker,
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2007). In this study, we decided to reassess candidate and Turkey has to make the necessary empirically the impact of strategy on firm changes to its political and economic systems in performance applying the strategic group concept. order for its membership to be accepted (Wikipedia, Most of the earlier studies had examined developed 2007). Many industries that were heavily regulated economies since most researchers carried out their traditionally have seen these strict regulatory systems research in these economies. In this study, we being dismantled. In fact, Turkey has been becoming examine Turkish Insurance Industry. Turkey is a more and more attractive for foreign firms. For candidate for accession to the European Union (EU) example, it is ranked at 53 in 2006 for the ease of and has been in the process of introducing legal and starting a new business according to the World Bank fiscal policies which will make it an equal member of survey of countries (World Bank, 2007). According the EU. Turkey has also been attempting to reducing the World Bank reports, Turkey is one of the top five bureaucracy to make it attractive for businesses to reformers to make doing business in their country enter. Entry of new entrants intensifies the easy (The World Bank, 2005). Despite facing the competition in industries and firms need to adopt most turbulent political environment during the strategies that suit their resource endowments. Given 1990s, Turkey has had a stable government since this reality, we anticipate that the impact of strategy 2002 providing stable political environment. The will be discernible. political turbulence of the 1990s resulted in economic problems and financial crisis in 2001. The economic HYPOTHESIS reforms brought about following the crisis with the support of IMF and which were ratified by the The hypothesis tested in this study is simple and is Government after 2002 elections ensured that central to strategic management research. That is, the Turkish economy became stable (The Economist firm strategy has significant impact on its Intelligence Unit, 2005). performance. Since strategic group is formed of firms with similar strategies, the performance will Traditionally, Turkey had a mixed economy and in differ across strategic groups. Hence the following most industries private companies, public companies hypothesis: and joint venture between private and public companies thrived. Due to poor performance of Hypothesis 1: public companies, the privatization of these public Firm performance will significantly differ across companies started in the 1980s. The insurance strategic groups. industry was started with the entry of foreign firms early on but later both public and private Turkish Null hypothesis: companies and joint ventures between Turkish and foreign companies became active (Association of the Firm performance will be the same across strategic Insurance and Reinsurance Companies of Turkey groups. (TSRSB), 2007). In order to satisfy the European Union requirements and to make the economy run METHODOLOGY more efficiently, joint ventures between private and In this study we chose to examine Turkey which has public companies started in the insurance industry. been going through regular changes in political and The introduction of Insurance Auditing law of 1990 regulatory environment in order to meet the relaxed the control over how firms competed (e.g., in requirements of European Union. Turkey applied for non-life insurance sectors, firms could participate associate membership in the European Economic where and how they deemed fit) resulting in Community in 1959 and signed the association increased competitive intensity. Following the Asian agreement in 1963. In 1987, Turkey applied for Financial crisis of 1997, Turkey faced its own formal membership into the European community. financial crisis in 2001 which had significant impact In 1999, European Union recognized Turkey as a on the insurance industry due to its link to banking
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sector which was affected heavily. Right now, the peaks when the incremental exploratory power of the Turkish insurance industry is at a satisfactory new cluster created drops below 0.05. The number of condition in terms of performance and competitive clusters thus selected is considered adequate to capabilities (TSRSB, 2007). Since we were explain the variance in strategies across different interested in an industry which faced changes in its firms. Analysis of Variance (ANOVA) will be used external environment, the insurance industry fitted to test the impact of strategic group membership on well with our requirements. firm performance. ANOVA was carried out for every year from 1998 through 2005 and all the three The data for these insurance firms were collected performance variables were tested independently. from the Department of Treasury, Government of The results of analyses of variance are presented in Turkey. There were forty-one firms in 1998 and Table 2. thirty-one firms in 2005. In order for us to map the movement and to minimize effects of extreme values, RESULTS we followed twenty-seven firms from 1998 through to 2005 though twenty-five firms remained in the The findings clearly indicate that the results are not 2005 sample. consistent but more results support the hypothesis that strategy has significant impact on firm Traditionally, the strategy variables were divided into performance. The performance measured by the product market scope variables and resource combined ratio is the least consistent where as deployment variables. In this study, we used the strategy had significant impact on market share and strategic variables from Fiegenbaum and Thomas weighted market share most of the years except 1998. (1993). Fiegenbaum and Thomas (1993) studied the Overall, during seven out of eight years examined US insurance industry and the data for that study was and fifteen out of twenty-four tests carried out, the collected from Best‘s Insurance Reports. We used hypothesis that strategy affected firm performance three variables to capture the product market scope: has been supported. If one excluded the tests carried the proportion of business was from personal out on the impact of strategy on combined ratio, the insurance, a Herfindal index to measure product hypothesis is supported every year except 1998. diversification, and firm size. We used four variables Though more consistent support to the hypothesis to capture the resource deployment decisions: would be welcome, it is important to see if we could expense ratio (to measure cost effectiveness), explain the findings. proportion of reinsurance used (to measure how the risk is spread to third party insurers), financial DISCUSSIONS leverage and nature of investment (as a proportion of The combined ratio measures economic efficiency stocks to total investment). Three performance (how well the net premium written is utilized). measures were used to assess how well these Though this measure is supposed capture how insurance firms performed: combined ratio (a efficiently the funds have been used, the firm does measure equivalent of return on sales), market share not have any control over two major components: and weighted market share (capturing the diversified loss incurred and loss adjustment expenses since both nature of the firm and how well it did in its chosen these depend not on firm‘s efficiency but on markets). All the variables are defined in Table 1. unexpected adverse external events (accidents, The SAS software was used for the statistical natural calamities etc.). Given that reality, it is analysis and the clustering procedure was used to difficult to manage combined ratio by any firm identify strategic groups. The number of effective strategy. Then, what is the purpose of using this as a clusters was determined using the Cubic Clustering performance measure? Investors and customers Criteria (CCC). The Cubic Clustering Criteria should know how well a firm did despite changes with the number of clusters created and uncontrollable external events. As long as firms were able to explain their performance, investors and
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customers would continue to support it. But, if firms Strategic Management). Journal of Management never reported this measure of performance, then Studies, 30(1): 51-67. firms could hide behind measures which hide their real financial health. Also, firms at times sacrifice Caves, R. E. and Porter, M. E. (1977). ―From entry short term performance to achieve sustainable long barriers to mobility barriers‖, Quarterly Journal of term performance. That is, if market share would Economics, 91: 241-61. provide a sustainable long term performance, firms Cool, K. and Schendel, D. (1987). ―Strategic Group would sacrifice short term performance and attempt Formation and Performance: The Case of the U.S. to gain more market share. This behavior also Pharmaceutical Industry, 1963-1982‖, Management explains why performance measures capturing Science, 33(9): 1102-1124. market share is consistently different across strategic groups. Fiegenbaum, A. and Thomas, H. (1993). ―Industry and Strategic Group Dynamics: Competitive Strategy To some extent, these findings support the effort put in the Insurance Industry, 1970-84‖, Journal of into strategic management and developing Management Studies, 30(1):69-105. competencies, acquiring resources and constantly adapting strategies to suit the changes in the external Hunt, M. S. (1972). ―Competition in the Major environment should all be worth it because strategy Appliances Industry, 1960-1970‖, Unpublished Ph. does have a significant impact on firm performance. D. Dissertation, Harvard University. This is the first of the exploratory study of the Turkish insurance industry. Though the results of Leask, G. and Parker, D. (2007). ―Strategic groups, hypothesis testing did not support the hypothesis competitive groups and performance within the U.K. 100%, the high support for the hypothesis observed pharmaceutical industry: Improving our in the Turkish insurance industry is encouraging. understanding of the competitive process‖, Strategic Though it is very difficult to make any universally Management Journal, 28(7): 723-745. applicable conclusions, this study is in line with Lewis, P. and Thomas, H. (1990). ―The Linkage earlier research and hence one could conclude that between Strategy, Strategic Groups, and Performance managers consciously could choose firm strategy to in the U.K. Retail Grocery Industry‖, Strategic improve firm performance. Management Journal, 11(5): 385-397. REFERENCES Marlin, D.; Huonker, J. W. and Hasbrouck, R. B. Association of the Insurance and Reinsurance (2004). ―Navigating Turbulent Times: Strategic Companies of Turkey (2007). ―History‖, Groups and Performance in the Hospital Industry, 1983 To 1993‖, Organizational Analysis, 12(2): 91- http://www.tsrsb.org.tr/tsrsb_eng/theAssociation/Hist 107. ory/, accessed June 18, 2007. Marlin, D.; Huonker, J. W. and Sun, M. (2002). ―An Athanassopoulos, a. d. (2003). ―Strategic groups, examination of the relationship between strategic frontier benchmarking and performance differences: group membership and hospital performance‖, Evidence from the UK retail grocery industry‖, The Health Care Management Review, Fall 2002, 27(4): Journal of Management Studies, Jun 2003, 40(4): 18-29. 921-953. McGee, J. and Thomas, H. (1986). ―Strategic Bogner, W. C. and Thomas, H. (1993). ―The role of Groups: Theory, Research and taxonomy‖, Strategic competitive groups in strategy formulation: a Management Journal, 7:141-60. dynamic integration of two competing models.‖ (Special Issue: Perspectives on Theory Building in
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Pandian, J. R.; Thomas, H.; Furrer, O.; and Bogner, The International Bank for Reconstruction and W. C. (2006). ―Performance differences across Development / The World Bank (2005). ―Doing strategic groups: an examination of financial market- Business: Removing Obstacles to Growth‖, A co- based performance measures‖, Strategic Change, publication of the World Bank, the International Nov./Dec. 2006, 15(7/8): 373-383. Finance Corporation and Oxford University Press, The World Bank: Washington, D.C. Short, J. C.; Palmer, T. B. and Ketchen, D. J. Jr. (2002). ―Resource-based and strategic group The World Bank (2007). Explore economies, Turkey influences on hospital performance‖, Health Care available at Management Review, Fall 2002, 27(4): 7-17. http://www.doingbusiness.org/ExploreEconomies/?ec onomyid=191 accessed June 18, 2007. The Economist Intelligence Unit (2005). ―Country Profile: Turkey‖, The Economist Intelligence Unit: Wikipedia, the free encyclopedia (2007). ―Accession London, UK. of Turkey to the European Union‖,
http://en.wikipedia.org/wiki/Accession_of_Turkey_to _the_European_Union, updated June 18, 2007, accessed June 20, 2007.
Dr Pandian, University of Illinois, teaches strategic management and international business and his research interests include competitive strategy, internationalization, and resource based view. Dr Akhisar, Istanbul Technical University, Turkey, teaches Statistics, mathematics and actuarial science and his research interests include multivariate statistical analysis and applied statistical research.
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Table 1 Strategy and Performance Variables Strategic Strategic Function Variable Definition Component/ name Performance Variable Product Product Scope A1 Personal Net Premiums Written(NPW) Market ( Personal NPW +Commercial NPW) Scope Product Diversity A2 n 2 H=1 pi where Pi is the relative size of the ith line in the firm portfolio i1 i=1…n is the number of lines Firm Size A3 LOG(NPW) Resource Production B1 Underwriting Expenses Deployment Efficiency NPW Risk Coverage B2 Direct Premium Written – NPW NPW Finance B3 Net Premium Earned Policy Holder Surplus Investments B4 Stocks Stocks + Bonds Performance Combined Ratio CR (Incurred losses + Loss Adjustment Expenses + Underwriting Expenses + Dividends) Measures Net Premium Written (NPW) Market Share MS Firm‘s net premium written Industry net premium written Weighted Market WMS R Share Pi LB i where i = indicates line of insurance, Pi = relative share of line in the total i1
Portfolio, LBi = the market share of the line in the segment
Table 2 Independent Variable: Strategic Group Membership (Strategy)
Dependent Year 1998 1999 2000 2001 2002 2003 2004 2005 Variable Model Combined Ratio R-Square 0.1264 0.0516 0.0877 0.0075 0.0244 0.0696 0.2251 0.5801 F=Value 1.11 0.42 0.74 0.06 0.21 0.57 2.13 9.67 Pr > F 0.3656 0.7426 0.5407 0.9800 0.8894 0.6382 0.1253 0.0003 Sig, level *** Market Share R-Square 0.2057 0.3559 0.1709 0.3902 0.4982 0.4072 0.2600 0.2828 F=Value 1.99 4.24 1.58 5.12 8.27 5.27 2.58 2.76 Pr > F 0.1443 0.0160 0.2214 0.0070 0.0005 0.0065 0.797 0.0676 Sig, level ** *** *** *** * * Weighted Market R-Square 0.2044 0.3864 0.1801 0.4786 0.4466 0.2998 0.3118 0.2781 Share F=Value 1.97 4.83 1.68 7.34 6.72 3.28 3.32 2.70 Pr > F 0.1467 0.0095 0.1982 0.0012 0.0018 0.0390 0.0385 0.0719 Sig, level *** *** *** ** ** * Number of Observations 26 26 26 27 28 26 25 24
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MARKET EFFICIENCY IN THE POST-LOCKOUT NHL: ELIMINATING THE REVERSE FAVORITE-LONGSHOT BIAS Rodney J. Paul, St. Bonaventure University Andrew P. Weinbach, Coastal Carolina University Mark Wilson, St. Bonaventure University
ABSTRACT When the National Hockey League returned from its one year hiatus due to a lockout by the owners, it returned with many changes. Perhaps the most important change on the ice was the addition of a shootout. This rule change led to an elimination of the tie from the standings and changed how hockey is bet in Las Vegas and offshore. Hockey betting went from a combination of a half-goal line with an odds adjustment to strictly odds betting, similar to the baseball betting market. In the years after the lockout, no evidence of the reverse favorite-longshot bias is found. The market appears to now be efficient, with the bettor bias toward big favorites and road favorites found in previous studies eliminated. Possible reasons for this change in the market are discussed.
INTRODUCTION have been opened to the somewhat random world of a 1-on-1 shootout. When the National Hockey League (NHL) returned from its one year lockout of 2004-05, it boasted a Shootouts are not unheard of in the sports or sports team roster salary cap for the first time and new rules betting world. Events such as the world cup of on the ice. These new rules included a shootout to soccer, which has an avid following both in terms of determine the winner of a tied contest (after a 5 spectators and gamblers around the world, have minute 4-on-4 overtime), stricter restrictions on the shootouts to determine winners in elimination size of the goaltender equipment, the elimination of matches. Even hockey in the Olympics has a history the red line so that 2-line passes were now allowed of shootouts, including Peter Forsberg‘s spectacular (which theoretically would allow for more breakaway goal in 1994. Although there is precedent for chances and odd-man rushes (2-on-1 or 3-on-2)), and shootouts in some betting markets, this major change a renewed emphasis on the calling of penalties for the in how winners are determined in NHL games could clutching-and-grabbing (obstruction) that were very much alter the expectations of bettors and the prevalent in the game before the lockout (which prices (odds) that are determined in this market. would lead to more power plays and more scoring opportunities). This paper explores the nature of the favorite- longshot bias as it applies to the new NHL. Using 2 These new rules led to changes in the betting market full regular seasons worth of data, testing for the for the NHL as well. Given that ties were eliminated, favorite-longshot bias (and the reverse of this bias) is the typical betting line of using a half-goal line performed for the sample of games as a whole and in coupled with odds was replaced across the board by a variety of subsets of the data following the lead of odds betting that mimic the wagering market for Woodland and Woodland (1994; 2001) and the baseball. Given that games still tied at the end of corrections to testing the favorite-longshot bias regulation and a 5-minute overtime now proceed to a provided by Gandar, Zuber, Johnson, and Dare shootout, where a winner is always determined, (2002) and Gandar, Zuber, and Johnson (2004). games that previously would have been a win for underdog bettors if the game concluded in a tie, now Subjective and objective probabilities of underdog wins are shown for samples of all underdogs, home
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underdogs, and ―heavy‖ and ―slight‖ underdogs in Similar biases have been found in sports betting, in each sample. Z-tests of the null hypothesis that the cases where simple strategies such as wagering on subjective and objective probabilities are the same home underdogs or on big underdogs have been are tested. The likely reasons for the findings of the shown to be profitable in pointspread markets and test results concerning efficiency and the reverse of wagering on the under has been shown to be the favorite-longshot bias are then discussed. profitable for totals markets. Some examples of the biases in pointspread markets are Golec and BETTOR BIASES IN WAGERING MARKETS Tomarkin (1991) and Gray and Gray (1997) in the NFL, Dare and McDonald (1996) and Paul, In an efficient market, no simple investment Weinbach, and Weinbach (2003) in college football, (wagering) strategies are expected to be profitable Paul and Weinbach (2005) in the NBA, and Paul and (null hypothesis of no profitability) or to exceed the Weinbach (2005) in college basketball. Examples in expected return, which in the case of gambling totals markets include Paul and Weinbach (2002) in markets is negative (null hypothesis of a fair bet). the NFL and Paul, Weinbach, and Wilson (2004) in When simple investing or wagering strategies are the NBA. found that reject the efficient markets hypothesis, questions arise about the validity of the theory itself In professional sports that use odds in the betting and/or the structure of the market in which the market, such as Major League Baseball and the rejection of the efficient markets hypothesis is found. National Hockey League, the reverse of the favorite- longshot bias was actually found. This reverse bias One recurring rejection of at least the weak-form of implies that favorites are overbet and underdogs are market efficiency is the favorite-longshot bias and its underbet meaning that bets on the underdog will win reverse. The existence of the favorite-longshot bias more often than implied by efficiency and could lead was first demonstrated in the scientific literature by to profits. These results were found by Woodland psychologists Griffith (1949) and McGlothlin (1956) and Woodland (1994, 2001) and both sports were in their studies of bettor behavior under uncertainty. found to have a significant reverse favorite-longshot Griffith and McGlothlin studied horse racing and bias. Woodland and Woodland did not equate a unit found that bettors tended to over-bet the long odds bet on the favorite and the underdog in the proper horses. The horses were over-bet to the extent that a manner, so their tests were corrected by Gandar, strategy of betting on long odds horses had a Zuber, Johnson, and Dare (2002) and by Gandar, significantly lower expected value than strategies of Zuber, and Johnson (2004). After the corrections betting on shorter-odds horses. were implemented, the baseball betting market was Later studies concerning the favorite-longshot bias by shown not to exhibit the bias, while the bias was still Ali (1977) and Asch et al. (1982) found similar found in the hockey betting market, although to a results in horse racing at tracks in New York and slightly lesser extent than originally estimated. Atlantic City, respectively. Meanwhile, Busche and THE POST-LOCKOUT NHL BETTING Hall (1988) do not find the bias in their study of pari- MARKET: 2005-06 TO 2006-07 mutuel wagering in Hong Kong, suggesting that this bias may not represent a universal human preference. The betting market for NHL games, before the It has been suggested that the source of the favorite- addition of shootouts to the end of tied games, was longshot bias is the tendency of people to over- typically structured using the so-called ―Canadian‖ estimate the likelihood of unlikely events and Line. This format consisted of one team being underestimate the likelihood of likely events (Sauer, favored by a half of a goal. Typically, this half-a- 1998, and Slovic et al., 1982), although other theories goal pointspread was also accompanied by odds that abound as well. could involve laying additional money (to win a dollar) on the favored team on the goal line or
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possibly laying additional money on the underdog their tests. The following model uses the Gandar, et team (against the half goal). Straight odds betting al (2004) correction for the definition of a unit bet. was not common due to the prevalence of ties and the fact that all monies (commission included) are Under the traditional assumption of sportsbook returned in the cases of tied bets (pushes). behavior, in order to capture a risk-free return, the sportsbook must attract unit bets on the favorite and
With the elimination of the possibility of a tie in underdog such that X + (1/ β1)X = Y + β2Y, where X NHL games, sportsbooks converted hockey betting is the number of unit bets on the more popular side of into a form familiar to American and Canadian the proposition and Y is the number of unit bets on bettors from baseball. Games were bet with strictly the less popular side of the proposition. The odds on the favorite and odds on the underdog. One commission of the sportsbook is net receipts divided other major change, which likely has nothing to do by total dollars bet, which is calculated as: with the change in format of hockey betting, is that the sportsbook‘s commission on hockey bets has c = Y - (1/ β1)X / (X+Y). (1) been lowered over time. Not long ago, all hockey This simplifies to: bets in Las Vegas occurred at a 20-cent line. A 20- c = (β1 - β2) / (2β1 + β1β2 +1), (2) cent line means that there is a 20-cent difference defining the more popular (the overlay side of the between what amount must be bet on the favorite (to proposition) and less popular prices respectively as β1 win $1) and what amount is returned (in addition to and β2, with β1 > β2 ≥ 1 $1) on the underdog. Over time, due to increased Under the null hypothesis of efficiency, betting volume and competition between on-line expected returns on any bet are equal to the negative sportsbooks, illegal local bookies, and legal of the commission of the sportsbook. Expected sportsbooks in Nevada for betting dollars, the returns to unit bets on the less popular side of the commission on the NHL has decreased to a standard proposition are defined as:
10-cent line, which is graduated as the odds on the E(R1) = ρ(β2 + 1) -1 (3) favorite increases. and expected returns to unit bets on the more popular side of the proposition are defined as: A typical hockey betting scenario, on the sides (betting on a team to win) market, looks as follows: E(R2) = -ρ((1/ β1) + 1) + (1/ β1), (4) where ρ is the subjective probability of an underdog NY Islanders +115 win and is equal to: ρ = (1 + β ) / (2β + β β +1). (5) NY Rangers -125 1 1 1 2 The expected returns to all simple strategies are In this game, the Rangers are the favored team. A bet negative due to the difference in prices for each on the Rangers of $1 will return the original $1 plus proposition. The expected losses of the bettors $0.80 (1/1.25), if the Rangers win the game. A bet represent the commission earned by the sportsbook. on the Islanders of $1 will return the original $1 plus $1.15, if the Islanders win the game. Table I presents the results of the NHL betting market for the 2005-06 and 2006-07 seasons. In each To study market efficiency in the betting market for table, the number of observations, the subjective totals in the National Hockey League, we use the probability of an underdog win (the expected tests first used by Woodland and Woodland (2001) percentage of wins by the underdog implied by the and later adjusted for the proper use of a unit bet by closing odds in the betting market), the objective Gandar, et al (2004). Both of these studies tested probability of an underdog win (the actual percentage market efficiency in the market for hockey betting of underdog wins from the games themselves), and (on the side in the game) and the implications for the Z-statistic of the test that the subjective and totals markets in hockey are a simple extension of objective probabilities are equal, are presented.
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The table includes two major groupings: All the null hypothesis of the subjective and objective underdogs and Home Underdogs. Home underdogs probabilities of an underdog win being the same are included as a separate sample due to the relative cannot be rejected. In short, the betting market betting success of home underdogs found in various appears to be quite efficient. pointspread and odds betting markets. Each grouping is then broken into different sub-samples, in addition One possibility of how a bias could still exist within to the sample as a whole, that include ―Heavy‖ this market is that the definition of a ―heavy‖ underdogs (midpoint of odds of 160 or greater – underdog is not high enough. Longshots that are favorite at -165 and underdog at +155) and ―Slight‖ overbet at horse or dog racing tracks consist of odds underdogs (midpoint of odds of less than 160). This far greater than +155. Therefore, other classifications distinction was first used by Woodland and of ―heavy‖ underdogs were considered, specifically Woodland (2001) and then used in the unit bet for midpoints of odds greater than 250 and greater correction of the original model by Gandar, Zuber, than 200. The results, with similar structure to table and Johnson (2004). I, are shown in table II.
Table I: NHL Betting Market Results: 2005-06 to Table II: Alternative specifications of ―Heavy‖ 2006-07 Seasons Underdogs – NHL 2005-06 to 2006-07
All All Dogs Dogs Specification of Obs Subj. Prob. Obj. Prob. Z-Stat Subset Obs Subj. Prob.of a Obj. Prob. Z-Stat ―Heavy‖ Dogs Of a Dog of a Dog Dog Win Of a Dog Win Win Win > 250 240 0.2560 0.2625 0.2306 All 2340 0.3907 0.3885 - > 200 491 0.2875 0.3096 1.0802 0.2220 Home Heavy 1000 0.3266 0.3160 - Dogs Dogs 0.7177 > 250 7 0.2647 0.1429 - ≥ 160 0.7305 Slight 1340 0.4385 0.4425 0.2976 > 200 50 0.3142 0.3600 0.6976 Dogs < 160 Home Dogs Using a higher threshold for the specification of All 648 0.4163 0.4090 - ―heavy‖ underdogs does not reveal a reverse of the 0.3776 favorite-longshot bias either. None of the z-statistics Heavy 190 0.3511 0.3105 - for the null of the subjective and objective Dogs 1.1725 probabilities being equal can be rejected. Home ≥ 160 Slight 458 0.4433 0.4498 0.2799 underdogs of > 200 do win more than implied by Dogs efficiency, as do all underdogs of > 200, but neither < 160 are statistically significant at normal levels. Again, the reverse of the favorite-longshot bias does not appear within this sample. As can be seen in table I, the reverse of the favorite- longshot bias that was present in the sample of There a few possible reasons for the lack of a reverse Woodland and Woodland (2001) and Gandar, Zuber, favorite-longshot bias in the post-lockout NHL. and Johnson (2004), is not present in the post-lockout Some of these have to do with the evolution of the ―new‖ NHL. For the sample as a whole and for the betting market and the technology that supports it and subset of ―heavy‖ favorites, underdogs win less another has to do with the change in how outcomes frequently than implied by the odds, suggesting, if are determined in this ―new‖ NHL. One potential anything a favorite-longshot bias, not the reverse. reason for the disappearance of the bias is the None of the Z-statistics are significant, meaning that expansion of betting in the United States and Canada.
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Through the evolution of on-line betting, many more English Soccer, a market where one could bet on a tie bettors on NHL games have been brought into the (draw) directly, that there is a bias against betting the fold. This increase in liquidity in the market it may tie (Deschamps, 2007). This could have been evident have improved the accuracy of the betting lines, in the NHL as well, even though a direct bet on the correcting the bias previously found among the more tie was not available in Las Vegas or through limited market of NHL bettors. At the same time, the traditional illegal bookies. When betting the favorite increased competition between sportsbooks has on the old ―Canadian‖ line, a tie was a loss. In lowered the commission which has also likely betting the underdog on the ―Canadian‖ line, an contributed to the increase in bettors in the NHL outright win by the underdog or a tie resulted in a wagering market. betting win. Much like in soccer, the probability of a tie may have been generally undervalued by bettors. Another potential reason for the disappearance of this Particularly in games with a heavy favorite, bettors bias is technology. The internet has provided more may have been discounting the probability of a tie, data in a speedy fashion than was possible at the time more focused on who would win the game, the of the studies by Woodland and Woodland (2001) favorite or the underdog. This discounting of the and Gandar, Zuber, and Johnson (2004). With plenty likelihood of a tie may have exaggerated any of internet sites showing all sorts of regular NHL ―normal‖ bias that may have existed toward wagering statistics, injury reports, and even historical betting on favorites in sporting contests. data, understanding and exploiting simple betting biases, such as the overbetting of big favorites, CONCLUSIONS becomes much easier for bettors. This expansion of information may have therefore enhanced the The betting market in the post-lockout NHL is accuracy of the betting market, dampening any biases examined to test for the existence of the reverse of and significant deviations from market efficiency. the favorite-longshot bias. This reverse bias was originally found by Woodland and Woodland (2001) Apart from increased betting activity, competition for a sample of NHL seasons of 1990-1991 to 1995- among sportsbooks, and better available information, 1996. Their tests were later corrected by Gandar, the way the NHL betting market is set up and the Zuber, and Johnson (2004) for the same sample, but outcomes of NHL games in the post-lockout world both papers found the existence of a statistically have likely also contributed to the apparent increases significant reverse favorite-longshot bias. in efficiency of the betting market. First, the old- style ―Canadian‖ line of a half-goal favorite coupled In the post-lockout NHL, the reverse favorite- with odds was somewhat difficult for bettors to longshot bias is not found. Favorites actually win understand. This likely contributed to the relatively slightly more often than implied by efficiency, which light betting volume in the NHL compared to other would support a favorite-longshot bias (not the sports. With the elimination of the tie from NHL reverse), but none of the groupings for all underdogs game outcomes, there was no longer a need for a or home underdogs produced returns significantly half-goal line to prevent pushes, and therefore bettors different from those implied by efficiency. The were offered strict odds betting on NHL games. market for the ―new‖ NHL simply appears to be These odds are familiar to bettors from sports such as efficient. baseball and likely made betting on NHL more Potential reasons for the disappearance of the reverse attractive to some bettors. favorite-longshot bias from the NHL betting market The elimination of the tie from NHL game outcomes stem from the expansion of the NHL betting market, may have also contributed to the removal of the the increased availability of information on NHL reverse of the favorite-longshot bias due to the nature games via the internet, and the change in the betting of bets themselves. It has recently been shown in mechanism (a change from a goal line and odds to just odds) in which hockey is bet. An increase in the
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number of bettors on NHL games, due to internet Market on National Hockey League Games. Journal expansion and an increase in wealth, and bettor of Sports Economics, 5(2), 152-168. access to statistics, game information, and historical betting records on-line have led to the odds being Golec, J. and Tamarkin, M. (1991). The degree of more accurate. The elimination of the tie in hockey, price inefficiency in the football betting markets, due to the introduction of the shootout, has also likely Journal of Financial Economics, 30, 311-23. led to more accurate odds as bettors, who in the past Gray, P. and Gray S. (1997). Testing Market may have been deterred from betting on NHL games Efficiency: Evidence From the NFL Sports Betting by the unfamiliar posting of the ―Canadian‖-style line Market, Journal of Finance, 52, 1725-37. have added volume and liquidity. In addition, any bias that may have resulted from bettors Griffith, R. M. (1949). Odds Adjustments by inappropriately discounting the likelihood of a tie, American Horse Race Bettors. American Journal of which in the past would have been a win for Psychology, 62:290-294. Reprinted in Hausch et al., underdog bettors that may not have been recognized 1994. by those who wagered on the favorite, has been removed by the introduction of the shootout to McGlothlin, W. H. (1956). Stability of Choices determine winners in each contest. Among Uncertain Alternatives. American Journal of Psychology 69:604-615. Reprinted in Hausch et al., REFERENCES 1994.
Ali, M. M. (1977). Probability and Utility Estimates Paul, R. J. and Weinbach, A. P. (2002). Market for Racetrack Bettors. Journal of Political Economy Efficiency and a Profitable Betting Rule: Evidence 85 (4): 803-815. Reprinted in Hausch et al., 1994. From Totals on Professional Football. Journal of Sports Economics, 3(3), 256-263. Asch, P., Malkiel, B.G., Quandt, R.E. (1986). Market Efficiency in Racetrack Betting. Journal of Paul, R. J., Weinbach, A. P., and M. Wilson. (2004) Business, 59 (1): 157-160. Efficient Markets, Fair Bets, and Profitability in NBA Totals 1995-96 to 2001-02. Quarterly Review of Busche, K., and Hall, C.D. (1988). An Exception to Economics and Finance, 44:4 (2004): 624-632. the Risk Preference Anomaly. Journal of Business 61(3): 337-346. Paul, R. J., Weinbach, A. P. (2005). Bettor Misperceptions in the NBA: The Over Betting of Dare, W. H. and S. S. McDonald (1996). A Large Favorites and the "Hot Hand", Journal of Generalized Model for Testing the Home and Sports Economics 6(4): 390-400. Favorite Team Advantage in Point Spread Markets, Journal of Financial Economics, 40, 295-318. Paul, R. J., Weinbach, A. P., and Weinbach, C. J. (2003) Fair Bets and Profitability in College Football Deschamps, B. and Olivier G. (2007). Efficiency in Gambling. Journal of Economics and Finance. Betting Markets: Evidence from English Football, 27:2: 236-242. The Journal of Prediction Markets, 1, 61-74. Sauer, R. (1998). The Economics of Wagering Gandar, J., Zuber, R., Johnson, R.S., and Dare, W. Markets. Journal of Economic Literature 36(4): (2002), Re-examining the Betting Market on Major 2021-2064. League Baseball Games: Is There a Reverse Favorite- Longshot Bias?, Applied Economics, 34, 1309-1317. Slovic, P., Baruch, F., Lichtenstein, S. (1982). Facts Versus Fears: Understanding Perceived Risk. In Gandar, J., Zuber, R., and R. S. Johnson. (2004). A Judgment Under Uncertainty: Heuristics and Biases, Reexamination of the Efficiency of the Betting Cambridge: Cambridge University Press.
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Woodland, L. M. and Woodland, B. M. (1994). Market Efficiency and the Favorite-Longshot Bias: The Baseball Betting Market, Journal of Finance 49(1), 269-280.
Woodland, L. M. and B. M. Woodland (2001)
Market Efficiency and Profitable Wagering in the National Hockey League: Can Bettors Score on Longshots? Southern Economic Journal, 67(4), 983- 995.
Rodney J. Paul is an associate professor of economics at St. Bonaventure University. He received his PhD in Economics from Clemson University in 2000. His research interests include the economics and finance of sports, the efficient markets hypothesis, and time-series macroeconomics.
Andrew P. Weinbach is an assistant professor of economics at Coastal Carolina University. He received his PhD in Economics from Clemson University in 2005. His research interests include the economics of sports, the efficient markets hypothesis, and consumer behavior.
Mark Wilson is a lecturer of economics at St. Bonaventure University. He is currently ABD in Economics from Clemson University. His research interests include law and economics, the economics of sports, and industrial organization.
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AN EMPIRICAL ANALYSIS OF THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT WITH A FOCUS ON ASIA Katarina Keller, Susquehanna University Andrew Gilbert, PricewaterhouseCoopers Anne Stankiewicz, Goldman, Sachs & Co.
ABSTRACT
In decade-wise panel data regressions, we analyze the determinants of foreign direct investment (FDI). To diminish causality problems, we regress FDI for each decade from 1970 to 2000 on variables one decade earlier from 1960 to 1990. Using the World Bank World Development Indicators, we include many variables that could affect FDI. In the worldwide sample, openness to trade and enrollment rates in higher education are statistically highly significant in attracting FDI. Primary education enrollment rates show significance as well. In Asia, openness to trade, exports, and enrollment rates in primary and tertiary education are significantly promoting FDI. A high income per capita instead decreases it. Among East Asian countries, trade, exports, primary and tertiary enrollment rates, as well as government expenditures show significantly positive effects to subsequent FDI. The variables explain at least 77 percent of variation in FDI.
INTRODUCTION and GDP, Hansen and Rand (2006) establish lasting Note: The views expressed in this paper are those of the benefits of FDI on GDP, however, no long-run authors and do not necessarily reflect the views of impact of GDP on FDI as a share of GDP. Zhang respective employers. (2001) observes FDI increasing economic growth in China. On the other hand, according to Braga Foreign Direct Investment (FDI) is one of the most Nonnenberg and Cardoso de Mendonça (2005), relevant, critical factors to economic gains across growth causes FDI but not the other way around. countries. According to Chuang (2004), foreign capital can become a significant factor for beginning FDI can take place either by a company entering the developing stages of a nation. While this is directly and establishing production facilities in beneficial to countries like China or India, some another country, through the acquisition of an analysts have expressed concern about the ever- existing firm or plant by a foreign company. Even increasing centralization of the world‘s though the method is different, the underlying manufacturing production in East Asia, and reasons why an international company would want to particularly in China (Adams, 2004). However, establish production abroad are likely to be the same. evidence supports the argument that FDI is beneficial They would then decide on the most cost-effective to both developed nations and developing nations way of establishing production facilities, depending (Pantulu and Poon, 2003). on ease, the costs of converting existing facilities to the new production, as well as the benefits from The most specific benefits of FDI, especially of keeping existing employees, company structure, inward FDI, would be seen in growth of GDP per contacts, etc. The latter may depend on whether the capita. FDI is found to have a relatively more reason for establishing production is outsourcing with significant effect on growth than domestic the intention to sell back to the country of origin, or investment, if a sufficient level of human capital to enter the new market. This research will focus on stock is available (Borensztein, De Gregario and Lee, the pull-factors of the reasons for inward-investment 1998). In investigating the causal links between FDI into a country, rather than push-factors, causing
companies to direct their investments outward and promoting FDI. Within Asia, trade, exports, and away from the home country. enrollment rates are statistically significant in attracting FDI, while income per capita decreases it. The reasons why FDI takes place in one country Among East Asian economies, trade, exports, rather than in another vary. Production costs are primary and tertiary enrollment rates, as well as considered an important reason why companies government consumption are significantly positively establish production in a foreign country. Costs related to subsequent FDI. The regression variables come in many forms, such as shipping costs for this sample explain at least 77 percent of variation depending on the proximity of the country, the going in FDI. wage rate of workers, corporate tax rates, and the cost of upholding labor and environmental standards. The This paper is organized as follows: first, we provide a state of the economy, market conditions, and size, review of the relevant literature of the determinants including those of the financial markets, are also of FDI, especially as it relates to Asia and East Asia, important considerations. Good infrastructure, such then we address the methodology, followed by a as roads, rails, supply of raw materials, technology, discussion of the results from our panel regressions, telecommunications, internet connections, and the and the final section concludes our findings. availability of educated and skilled workers, facilitates new production. Soft infrastructure, such LITERATURE REVIEW as law and order and the political system are also The areas of costs, the state of the economy, as well crucial to a company‘s success, such as the likelihood as law and order and the political system have been that contracts will be upheld in court, the existence of identified in the literature as important to FDI. established police security, and potential risks of nationalization, delays from bureaucratic red tape, or Cost Factors as Determinants Of FDI sudden drastic changes in corporate tax rates. Costs to a company arise for varied reasons, and Openness to trade makes an economy more attractive choosing a country in which to invest might depend for companies so that products can be exported to on different cost factors. Some factors that have been other countries from the one in which production identified in the literature as attracting FDI and that occurs, as well as to be able to import resources can be categorized as cost related include proximity needed for production. to the home country, home country culture and This research analyzes the determinants of FDI, using language, labor costs, cost of environmentally safe decade-wise panel data regressions. The FDI technology, and corporate taxes. A common or variable is from each decade 1970 to 2000 and similar culture may, however not necessarily, be regressed on variables one decade earlier from 1960 thought of as a cost factor by the company. It may to 1990, to diminish causality problems. We include bring down costs in reducing the amount of changes many variables that could affect FDI mainly from the to the product and marketing. On the other hand, the World Bank World Development Indicators and then geographical distance could raise transportation exclude those of little availability and statistical costs. significance in order to find the variables of the Geographic and cultural distances are established as highest statistical significance worldwide, for Asia, negatively affecting cross-border mergers and and for East Asia. This allows us to see if the acquisitions (M&A) by Organisation for Economic variables attracting FDI worldwide are different from Co-operation and Development (OECD) member that within Asia or within East Asia, which are the firms (Bertrand, Mucchielli and Zitouna, 2007). In regions that have attracted much of the FDI going to comparing China and India as destinations for FDI less developed countries in the last decade. inflows from OECD countries, Wei (2005) finds that Worldwide, openness to trade and enrollment rates in China has larger FDI inflows. However, India has an primary and higher education are significantly advantage over China when it comes to its
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geographical and cultural closeness to OECD human and physical infrastructure, transport costs, countries. and political and economic stability are equal.
As would be expected, labor costs are found to attract Interestingly, while low costs are found to attract FDI, such as M&A (Bertrand, Mucchielli, Zitouna FDI, the literature does not seem to point to them as and 2007). China‘s low labor costs are a contributing the main reasons why FDI locates to one country factor to FDI into China (Hong and Chen, 2001). over another. Geographic proximity, culture and Despite receiving less FDI for other reasons, India is language similarities, low labor costs, low identified as having an advantage over China due to environmental standards, and low tax rates have its even cheaper labor costs (Wei, 2005). However, some effects. However, these do not seem to be the in investigating the importance of the abundance of main determinants as to where FDI is directed. low cost labor, Kumar (1999) establishes, in line with other literature, that this does not seem to play a Economic Factors As Determinants Of FDI significant role in determining FDI inflows. Other Macroeconomic variables are influential to FDI. In a factors are of higher importance. Home market 33-country panel from 1975-2000, Braga oriented export has declined with automation, Nonnenberg and Cardoso de Mendonça (2005) reducing the role of labor in the production process. estimate the main macroeconomic determinants of India is more successful in attracting software design FDI inflows into developing countries as being the and service centers, as well as research and size and growth of the economy, the level of labor development (R&D), because of the availability of education, FDI-friendly policies, country risk, and skilled labor and because electronic transmission is stock market performance. Economic freedom and not dependent on geographical distance. Other the level of GDP are found to be highly significantly literature finds similar results of FDI costs not positive to FDI, while debt service and inflation have depending on wage differences (see, e.g., Kumar, negative effects (Bengoa and Sanchez-Robles, 2003, 1999; and Dupuch and Milan, 2005, for Eastern for Latin America), although the host country Europe). requires sufficient human capital, economic stability, Low environmental standards and corporate tax rates and a liberalized market to benefit from FDI. The would lower costs and could therefore attract FDI. macroeconomic or socioeconomic environment is Low environmental standards could attract also shown to be important for different companies who do not want to take on the cost of administrative regions within China to benefit from upgrading their technology to adhere to higher FDI (Hon, Poon and Woo, 2005). environmental standards in the home country. In testing the hypothesis of the importance of However, according to Xing and Kolstad (2002), lax macroeconomic variables on FDI, Singh and Jun environmental regulations are only significant from (1999) find exports, especially manufacturing heavily polluting U.S. industries, while insignificant exports, to be a highly significant determinant of for less polluting industries. Low corporate tax rates FDI. They use Granger causality tests to establish would also be expected to lower costs and therefore that the causality runs predominantly from exports to be an incentive for companies to locate their FDI. The research by Singh and Jun (1999) supports production in countries with low tax rates. Bertrand, the trend of increasing complementarity between Mucchielli and Zitouna (2007) find low tax countries trade and FDI found in empirical research. as a group to be attractive to M&A. However, within According to Zhang and Felmingham (2001), the a low tax group, variations in the corporate tax rate causation of exports and FDI in China, in high- and show no signs of providing a further incentive. low-FDI-recipient regions, the causality is Morisset and Pirnia (1999) find little evidence that bidirectional, while exports cause FDI in the tax incentives matter, other than when factors such as medium-FDI-receiving regions. Moreover, Liu, Burridge, and Sinclair (2002) find weak bi-
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directional causality between economic growth, FDI, countries compared to India. According to Bende- and exports in China and state that their ―results are Nabende (1999), a low level regional economic consistent with previous findings that FDI takes place integration has lead to increased FDI among in China because growth and foreign trade prospects ASEAN-5 (Indonesia, Malaysia, Philippines, have made the country more attractive to foreign Singapore, and Thailand) economies, although only investors, reflected here in the causal link from indirectly through increased regional stability. growth, and exports to FDI... On the other hand, two- Moreover, the currency union has augmented FDI way causal links between these variables also imply among the European Monetary Union (EMU) FDI affects growth …‖ as found in previous literature members, however, without decreasing it for EU (p. 1438). Growth and foreign trade prospects seem countries outside the EMU (Aristotelous, 2005). to be mutually reinforcing under an open-door policy. These three variables affect imports, but not the other Not only openness to trade, but also financial way around. Liu, Wang, and Wei (2001) estimate openness is important in order to attract FDI. that, for China, the growth of imports causes the Moreover, financial stability and financial access are growth of FDI (from the home-country), which vital for FDI. Bertrand, Mucchielli, and Zitouna causes the growth of exports. The growth of the (2007) show that financial openness (measured as the latter causes the growth of imports. Aizenman and share of stock held by foreign residents on the stock Noy (2006), also using Granger causality find that market) is statistically significant to M&A. In Braga trade openness (exports and imports combined) leads Nonnenberg, and Cardoso de Mendonça (2005), to FDI by 31 percent and FDI leads to trade openness friendly policies toward foreign capital are highly by 50 percent. Graham (2005) finds that export significantly positive to FDI and likewise for stock processing zones lead to increased FDI, especially market performance. Jaumott (2004) finds that relevant in an initial stage to establish confidence and within a RTA, financial stability coupled with a credibility among investors. Thus, the literature relatively more educated labor force further attracts points to bidirectional causality between exports and FDI to certain countries within a RTA. FDI. It seems likely that trade openness and the Business practices, business conditions, ability to export products and import raw materials characteristics of the host-country market, and would attract FDI and as part of FDI is outsourcing especially the market size are critical in attracting this would in turn increase exports. FDI. According to Weinstein (1996), FDI into Japan Reduced trade costs seem to have increased FDI is inhibited by the business and trade practices in (Neary, 2006). Nevertheless, Singh and Jun (1999) Japan, such as government regulations restricting find evidence of tariff-hopping, where FDI flows into competition and labor-market barriers. Singh and countries with high-tariffs. In this case, FDI would Jun (1999) consider the business conditions in terms avoid the trade costs by producing inside the country. of the operation risk index, which assesses the As trade regions and trade ties are intended to lower general business climate, and find that a higher trade barriers between member countries, such quality of the general business climate is statistically regions would be expected to reduce trade costs in significant in increasing FDI. Characteristics of host- order to increase trade. Thus, the effect of tariffs on country markets, especially the market size, is critical FDI may either be a decrease or an increase. Hejazi to FDI, while economic freedom only shows high and Pauly (2005) find that regional trade agreements significance to FDI stocks in the 1990s (Zhang, (RTA) lead to intra- and inter- regional FDI, as also 2005). Market size, measured as GDP, is highly non-members increase FDI in the RTA (for NAFTA - significant in all samples, while GDP per capita (an see also Cole and Ensign, 2005). In Jaumott (2004), indication of income) is highly significant only to the the size of the RTA market positively impacts FDI. full-sample and developing countries, and the growth Wei (2005) explains China‘s higher level of FDI of GDP (a predictor of future market size and a partially by its stronger trade ties with OECD measure of market dynamism) only shows occasional
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significance to these samples, while is insignificance competitive and increase to already developed countries. Market size profitability, and they are seeking (production) is statistically significant to FDI in inexpensive labor wherever it is Bertrand, Mucchielli, and Zitouna (2007) and in found, but the tendency is toward a Braga Nonnenberg and Cardoso de Mendonça reduction in the demand for low- (2005). Hong and Chen (2001) similarly find that skilled labor and an increase in the great market potential is the most important demand for knowledge-based labor determinant of FDI into China. In comparing China in production processes. to India, Wei (2005) explains China‘s higher levels of FDI by its larger domestic market. Jaumotte (2004) He questions whether Caribbean education is enough demonstrates the market size of RTA to have a to attract knowledge-based FDI. Labor qualifications stronger positive impact on FDI than the domestic in terms of education raise FDI in Braga Nonnenberg market. and Cardoso de Mendonça (2005). The percentage of the population with secondary education is highly A country‘s infrastructure, such as roads, rails, significantly positive to FDI in panels with fixed communication, technology, as well as human capital effects. In Globerman and Shapiro (2002), the affects production and FDI. High quality roads are education index, which combines adult literacy with highly significant to FDI into China for each of the primary, secondary, and tertiary enrollment ratios, countries, while the amount of rail is highly has a large and highly significant effect on FDI significant only for Japanese and South Korean FDI inflows. Average schooling years in the population in China (Fung et al., 2006). In Rossotto, Sekkat, and over age 15 is highly significant to FDI stock both in Varoudakis (2005), better telecommunication sector the domestic and the regional model in Jaumotte performance is the second most important variable to (2004). She states that within a RTA, those countries FDI after market size, both in terms of the size and with a more educated labor force and a stable significance of the coefficient. Hong and Chen financial situation have benefited more from FDI (2001) demonstrate that imports of new technology than others. and equipment augment FDI in China.1 Societal And Political Factors As Determinants Of Human capital and skills are vital in attracting FDI. FDI Human capital is statistically significant and one of the most important determinants of FDI, and its Not only economic factors and economic stability, importance has increased over time (Noorbakhsh, but also political stability and the legal system matter Paloni and Youssef, 2001). They measure human in determining FDI. According to Morisset and capital alternatively as secondary school enrollment, Pirnia (1999), taxes only matter after other factors the stocks of either the number of accumulated years such as political and economic stability, of secondary schooling, or as secondary and tertiary infrastructure, and transport costs are equal. Singh education in the working-age population. The and Jun (1999) find that a qualitative index of measures are generally significantly positive to FDI political stability is a significantly positive at the 1 percent level. Griffith (2005, p. 979) states: determinant of FDI, and that sociopolitical instability negatively impact FDI flows. The coefficient on Firms from the more developed country risk is large and highly significantly negative countries are still trying to remain to FDI in fixed-effects panels in Braga Nonnenberg and Cardoso de Mendonça (2005). Even though India receives less FDI than China, Wei (2005) finds 1 Moreover, within Latin America, intellectual that one of India‘s advantages is in its lower political property rights increase FDI as well (Blyde and Acea, risk. Nevertheless, Bennett and Green (1972) 2003) generally do not find political instability to be a
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determinant of U.S. FDI in marketing, except the dynamic estimation of the variables effects on FDI hypothesis is accepted for Asian countries. across countries over time. The World Bank World Development Indicators, include hundreds of Globerman and Shapiro (2002) estimate different variables, and we initially included many variables indices for government infrastructure, and show that that could possibly affect FDI (see Table 1). the composite government infrastructure index However, we then excluded those showing little (which includes rule of law, instability, regulatory statistical significance (or of limited data burden, government effectiveness, corruption, and availability). Our main model includes those democracy, with a higher index indicating worse variables which showed signs of statistical conditions), and separately the regulatory burden significance to FDI: index (government intervention, trade policy, capital restrictions, etc.) are strongly negative and highly (1) ln(FDI/GDP)it = 0 + 1ln(GDP/capita)i(t-10) significant to FDI outflows from the U.S. to all + 2(Exports/GDP)i(t-10) + 3e1i(t-10) + 4e3i(t-10) + countries and separately to developing countries. 5(Trade/GDP)it + 6(Gov/GDP)it + it
Similarity of legal rules is favorable and highly where ln(GDP/capita) is the natural logarithm of significant to M&A (Bertrand, Mucchielli and GDP per capita, Trade/GDP is openness to Zitouna, 2007). Fung et al. (2006) show that policy international trade measured as imports plus exports and reform significantly induce FDI in China (state as a share of GDP, and Gov/GDP is government owned production has a negative influence). Rule of consumption exclusive of education expenditures as a law, investment law, property rights and civil society share of GDP. The data is generally from the World all show statistical significance to FDI and the Bank (2004) World Development Indicators, except variations in institutions explain 20-30 percent of the as noted. 2 The education variables are gross variation in FDI across transition economies (Grogan enrollment rates (ei) in primary and higher education and Moers, 2001). Investor protection improves FDI (i=1,3).3 Regressing them separately identifies their (Cyrus, İşcan and Starky, 2006; see also Gubitz, 1991). According to Gubitz (1991), easing investor restrictions (or providing modest incentives) are good 2 Political Rights are from Freedom House (2004), strategies for developing countries to attract FDI. except the 1960s values are from Bollen (1990). The FDI is more likely to take place when there are lower Rule of Law data is from Knack and Keefer (1998). local content requirement (Qui and Tao, 2001). Real GDP per capita and its growth rates are in constant 1995 $U.S. When CPI data is unavailable, Thus, not only is FDI more likely to flow toward the GDP deflator is used for that decade in where the micro- and macroeconomic conditions are calculating inflation rates. Political Rights and Rule favorable, but also where there is low political risk, of Law are transformed into scales of 0-1, where 1 law and order rule, and the institutions reduce indicate the most favorable conditions of democracy restrictions and the legal system protect FDI. and law and order (as in Barro, 1997).
Methodology 3 Gross enrollment rates include all publicly or In estimating the determinants of FDI, we use panel privately enrolled students, including those older than data, where the logarithm of average FDI over each their age group, as a share the standard age group for decade between 1970 and 2000 is the dependent that education stage. Some countries have primary variable. Using decade averages smoothes business enrollment rates exceeding 1 (or 100 percent), when cycles‘ impact on FDI. We regress FDI on variables students above the usual age group attend school. For lagged by one decade prior (1960 to 1990), which enrollment rates, observations not available in WDI diminishes causality problems, or alternatively (2003) but in WDI (2001), are inserted from the include them contemporaneously. This gives a latter.
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individual effects on FDI. Enrollment rates in The regression equation for the fixed-effects model secondary education do not show any statistical is: significance to FDI and is therefore excluded in the main model presented. (3) ln(FDI)it = ii + 1ln(GDP/capita)i(t-10) + 2(Exports/GDP)i(t-10) + 3e1i(t-10) + 4e3i(t-10) + This model specification is also applied to the sub- 5(Trade/GDP)it + 6(Gov/GDP)it + it samples for Asia and East Asia to identify any differences between countries worldwide in attracting where ii is a matrix of country dummies (bold font FDI inflows, and countries in Asia and East Asia. symbolizes vectors). The country dummy accounts for any enduring country-specific factors not We use an unbalanced data set, where missing included, such as culture, geography and history. By observations cut out the relevant decade data for that controlling for GDP per capita, these fixed effects are country. Including various variables which are unexplained nonmarket effects. expected to affect FDI reduces problems of possible omitted variables. The education variables further Table 1 impact other variables used as controls (see Keller, List of Variables Tested 2006a; 2006b). • Investment • Air transport, freight • Risk • Electricity production • Trade (exports & imports • Imports of fuel TESTING FOR FIXED EFFECTS of goods & services) • Price of diesel fuel AND THE FIXED-EFFECTS MODEL • Exports International tourism • Imports • Unemployment The assumption of a common constant between the • Manufacturing • CO2 emissions • Wages • GDP per capita world‘s countries as in the pooled least square (PLS) • Labor force • GDP per capita growth model may be too restrictive. It may also be • Primary, secondary & • Inflation rate (from tertiary enrollment rates Consumer Price Index restrictive for the Asian region, which includes varied • Household consumption or if unavailable GDP regions such as East Asia, South East Asia, South • Import vs. export duties deflator) • Royalty & license fees • Real interest rate Central Asia, and sections of the Middle East. This • Information & • Government model may even be restrictive for the East Asian communication consumption technology • Official exchange rates economies. The presence of fixed effects is tested • Research & development • Real exchange rates .(researchers vs. • Terms of trade and if found indicate that the unrestricted fixed-effect technicians) adjustment model, where each country has its own intercept, is • Taxes • Political rights • Roads, goods transported • Law and order more efficient. The following F-test examines the • Railroad, goods • Life expectancy (health) null hypothesis that the constant is equal for all transported • Fertility Rates countries within the sample (Greene, 1997, pp. 617- 18): One disadvantage with using fixed effects is that it reduces the cross-country differences, which are the 2 2 2 (2) F(n-1,nT-n-K) = [(Rf -Rp )/(n-1)]/[(1-Rf )/(nT-n-K)] strength of cross-country data, and instead focuses on the time-series variations (Barro, 1997). For example, where subscript f indicates the fixed-effects model, in Braga Nonnenberg and Cardoso de Mendonça with a dummy variable for each country, rather than a (2005), both models with a common constant and common intercept. The subscript p signifies the PLS with fixed effects are presented, and we follow their model. The test is applied to each sample and example. regression. RESULTS OF PANEL REGRESSIONS This F-test rejects a common intercept for all regressions presented. The PLS model provides Determinants Of Fdi Worldwide consistent and unbiased estimates, however, as the null hypothesis of a common constant is rejected, the As can be seen in Table 2, the most important fixed-effects model is also efficient. determinants of FDI worldwide are the openness to
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trade (exports and imports), as well as enrollment Table 2 rates in primary and higher education. Openness and Determinants of FDI Worldwide tertiary enrollment rates are statistically significant at the 1-percent level. Enrollment rates in primary Dependent Variable: FDI education are significant at the 10-percent level, Countries: 126; Total observations: 280 although with a 0.0521 probability it is close to the 5- Fixed percent level of significance. Exports are not PLS Effects significant at standard levels, however, are not far Variable Coefficient Coefficient from the 10-percent level. This model with a 0.0011 -0.212 common constant for countries worldwide explains GDP per Capita [0.018] [0.539] 31 percent of variation in FDI inflows. 0.326 -0.074 Exports/GDP [1.521]‘ [0.189] In a fixed-effects model with individual constants for 0.617 0.555 each country, the explanatory power increases to 58 Primary Education Enrollment Rates [1.951]* [0.905] percent. It is natural that allowing for differences in the unexplained effects for each country would Higher Education 2.392 7.831 increase the adjusted R-squared. In this model, Enrollment Rates [3.623]*** [4.273]*** openness and enrollment in higher education are Trade 1.229 3.035 significant at the 1-percent level. Government (Exports & Imports)/GDP [4.382]*** [4.039]*** spending only shows significance at the 20-percent Government Expenditures 1.446 4.69 level, which is not significant at standard levels. (excluding education) [0.886] [1.490]‘ Hence, it seems that the individual constants of F-statistic 22.083*** 3.966*** country-specific factors are related to primary Adjusted R-squared 0.312 0.582 enrollment, insinuating that perhaps schooling enhances those factors that provide for differences between countries in attracting FDI. Note: the absolute value of t-statistics in brackets. ***, **, *, and ‗ denote statistical significance at the In both the common constant and fixed-effects 1-, 5-, 10-, and 20-percent levels, respectively. models, the largest coefficients worldwide are those Regressed with a common constant, not reported. of enrollment in higher education. The countries Fixed effects not reported. White's receiving the most FDI inflows are those already heteroskedasticity-consistent covariance matrix is developed, such as Europe and the U.S., mainly used. because they are attractive as large wealthy markets with highly educated workforces. DETERMINANTS OF FDI IN ASIA
When the sample is limited to Asian nations, which still include a wide range of countries from East Asia to the Middle East, we find that the explanatory power of the regressions increases. These variables explain 48 percent of the variation in FDI among Asian countries for the regression with a common constant (Table 3). In this regression, trade is highly significant: openness to trade is significant at the 1- percent level, and exports are significant at the 5- percent level. Enrollment rates in primary school are statistically significant at the 10-percent level. Here, individual wealth matters also – the higher the GDP
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per capita, the lower the inward FDI flows. This is 1-, 5-, 10-, and 20-percent levels, respectively. then a sign of FDI inflows into Asia going to Regressed with a common constant, not reported. countries with lower per capita income such as India Fixed effects not reported. White's and China, where the average wage is lower, rather heteroskedasticity-consistent covariance matrix is than entering markets with wealthy individuals, like used. Japan. DETERMINANTS OF FDI IN EAST ASIA The fixed-effect model for Asia explains 68 percent We further limit the Asian sample to the East Asian of the variation of FDI inflows into Asia. When countries which have seen more development and country-specific reasons for attracting FDI is growth compared to the others, even though affected allowed, enrollment rates in higher education are adversely by the Asian crises of 1997. Over the time highly significant at the 5-percent level, and exports period of 1970-2000, the main reasons for some of are statistically significant at the 10-percent level. these countries attracting more FDI than the others Again, it seems that the fixed effects are related to are high levels of openness to trade and more primary education, yet there are still benefits government expenditures. The coefficient on the displayed in higher tertiary enrollment rates in government expenditure variable is the largest. The attracting FDI to a country. Foreign enterprises often trade and government consumption variables are both need the expertise, language skills, etc. of local significant at the 1-percent level. Primary school managers to run their operations. enrollment and exports are also both statistically significant at the 10-percent level. Average per-capita Table 3 income is negatively related to FDI, although is Determinants of FDI in Asia statistically insignificant. The variables in the model
with a common constant explain 77 percent of the Dependent Variable: FDI variation of FDI among East Asian economies. Countries: 31; Total observations: 61 Fixed The model with individual-country effects explains a PLS Effects full 96 percent of the variation of FDI inflows into Variable Coefficient Coefficient East Asian economies. Interestingly, the East Asian -0.225 -0.332 countries attracting higher levels of FDI than their GDP per Capita [1.981]* [0.531] peers are those with higher enrollment rates in 0.807 1.013 primary and higher education, the former significant Exports/GDP [2.426]** [1.977]* at the 1-percent level and the latter at the 5-percent Primary Education 1.533 1.797 level. Exports are statistically significant at the 10- Enrollment Rates [1.743]* [0.706] percent level. Higher Education 1.661 7.043
Enrollment Rates [1.089] [2.311]**
Trade 1.308 0.901
(Exports & Imports)/GDP [3.275]*** [1.306]
1.073 0.242 Government Expenditures (excluding education) [0.591] [0.063]
F-statistic 10.216** 4.587*** Adjusted R-squared 0.480 0.683
Note: the absolute value of t-statistics in brackets.
***, **, *, and ‗ denote statistical significance at the
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Table 4 workers with some basic schooling, as well as Determinants of FDI in East Asia employing managers with higher education.
Among the Asian nations, the variables indicating the Dependent Variable: FDI highest statistical significance are openness to trade, Countries: 8; Total observations: 20 Fixed as well as exports separately, and primary and tertiary PLS Effects enrollment rates. Variable Coefficient Coefficient Between East Asian economies, again openness to -0.108 -0.424 trade, exports and enrollment rates in primary school GDP per Capita [0.806] [0.742] and higher education display high statistical 0.643 0.878 significance. Additionally, the host country Exports/GDP [1.882]* [2.872]** government spending on the economy is highly Primary Education 3.77 6.547 significant to FDI inflows. The East Asian countries Enrollment Rates [1.920]* [5.764]*** that have shown the most development are those Higher Education 1.065 5.673 where the governments have taken active roles within Enrollment Rates [0.461] [2.619]** the market. That strategy seems to also have been Trade 1.52 0.599 beneficial to FDI inflows into those economies. (Exports & Imports)/GDP [3.951]*** [1.412] These variables (including also the average per-capita Government Expenditures 27.164 12.395 GDP which is statistically insignificant for the East (excluding education) [3.359]*** [1.335] Asian sample) explain at least 77 percent of the variation in FDI inflows. F-statistic 11.40032*** 35.434*** Adjusted R-squared 0.76659 0.959 These results confirm previous findings that FDI occurs in China because growth and foreign trade Note: the absolute value of t-statistics in brackets. prospects have made the country more attractive to ***, **, *, and ‗ denote statistical significance at the foreign investors, as reflected in the causal link from 1-, 5-, 10-, and 20-percent levels, respectively. growth and exports to FDI (Liu, 2002). The Regressed with a common constant, not reported. culmination of this research confirms previous Fixed effects not reported. White's literature linking statistically the relationship between heteroskedasticity-consistent covariance matrix is FDI and China‘s export skill (Adams, 2004). used. Conclusion Export processing zones have been found to be beneficial and lead to increased FDI, especially In finding what attracts FDI to certain countries, important in an initial stage to instill investor especially in Asia, this paper estimates the confidence (Graham, 2005). It would be interesting determinants of FDI using panel data over time for further research to establish if there is a certain worldwide, as well as for the sub-samples of Asian amount of openness or exports needed for investors and East Asian countries. The variables found to be to be ascertained that investing in the country is a statistically of the highest significance explain more good idea and that they will not have any trouble of the variations in Asian and East Asian FDI, up to exporting their products, or importing resources 77 percent for the latter group, for the most standard needed for production. regression model. This research points to the conclusion that FDI needs In the worldwide sample, the most highly significant its employees to have some amount of basic variables explaining FDI inflows are openness to schooling, and local managers to have higher trade and enrollment rates in primary and higher education. More high-tech production needing education. Foreign enterprises are likely to prefer perhaps a more technologically savvy workforce with
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a high-school education may stay in the home- Bengoa, M., B. Sanchez-Robles (2003). Foreign country. However, such education is still important Direct Investment, Economic Freedom and Growth, for countries to experience economic growth even if New Evidence from Latin America. European not from FDI, as shown elsewhere both worldwide Journal of Political Economy, 19, 529–545 and in Asia (Keller 2006a; 2006b). Bennett, P. D., and R. T. Green (1972). Political Our research indicates that openness to trade and Instability as a Determinant of Direct Foreign education are the variables that are of the highest Investment in Marketing. Journal of Marketing statistically significance to FDI in the following Research, 9, 182-86. decade. Thus, for policy-makers wanting to attract Blyde, J. S., and C. Acea. (2003). How Does FDI, these are two areas to further expand. Not only Intellectual Property Affect Foreign Direct do they promote FDI, which increases economic Investment in Latin America? Integration and Trade, growth of the country, but they also increase growth 7, 135-52. directly as shown worldwide and for Asia (Keller, Borensztein, E., J.-W. Lee, and J. De Gregorio (1998) 2006a, and 2006b). How Does Foreign Direct Investment Affect References Economic Growth? Journal of International Economics, 45, 115-135. Adams, F. G., B. Gangnes, and Y. Shachmurove (2004). How the Dragon Captured the World Export Braga Nonnenberg, M. J., and M. J. Cardoso de Markets, Outsourcing and Foreign Investment Lead Mendonça (2005). Determinantes dos Investimentos the Way. University of Pennsylvania, Department of Diretos Externos em Países em Desenvolvimento, Economics, Penn Institute for Economic Research Estudos Econômicos, 35, 631-655. Working Paper 04-042, 1-43. Chuang, Y. and P. F. Hsu (2004). FDI, Trade, and Aizenman, J., and I. Noy (2006). FDI and Trade-- Spillover Efficiency, Evidence from China‘s Two-Way Linkages? Quarterly Review of Economics Manufacturing Sector. Applied Economics, 10, 1103- and Finance, 46, 317-337. 1115. Aristotelous, K. (2005). Do Currency Unions Affect Cole, E. T, and P. C. Ensign (2005). An Examination Foreign Direct Investment? Evidence from US FDI of US FDI into Mexico and Its Relation to NAFTA, Flows into the European Union. Economic Issues, 10, Understanding the Effects of Environmental 1-10. Regulation and the Factor Endowments That Affect the Location Decision. International Trade Journal, Barro, R. J. (1997). Determinants of Economic 19, 1-30. Growth; A Cross-country Empirical Study, Cambridge, MA, and London, England: The MIT Cyrus, T. L., T. B. İşcan, and S. Starky (2006). Press. Investor Protection and International Investment Positions, An Empirical Analysis, International Bende-Nabende, A. (1999). FDI, Regionalism, Finance, 9, 197-221. Government Policy and Endogenous Growth, A Comparative Study of the ASEAN-5 Economies, with Dupuch, S., and C. Milan (2005). Les Déterminants Development Policy Implications for the Least des Investissements Directs Européens Dans les Pays Developed Countries. Aldershot, U.K.; Brookfield, d'Europe Centrale et Orientale. L'Actualité VT, Singapore, and Sydney: Ashgate. Économique/Revue D'Analyse Économique, 81, 521- 534. Bertrand, O., J.-L. Mucchielli, and H. Zitouna (2007). Location Choices of Multinational Firms, The Case Freedom House. (2002). Freedom in the World of Mergers and Acquisitions, Journal of Economic Country Ratings, 1972 through 2003, Freedom Integration, 22, 181-209. House, Inc., http,//www.freedomhouse.org/ratings/
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Fung, K, A. Garcia-Herrero, H. Iizaka, and A. Siu Hong, M. H., and L. S. Chen (2001). Quantitative (2006). Hard or Soft? Institutional Reforms and and Dynamic Analysis of the OLI Variables Infrastructure Spending as Determinants of Foreign Determining FDI in China. Review of Urban and Direct Investment in China. Banco de España, Banco Regional Development Studies, 13, 163-72. de España Working Papers, 0616, 1-23. Jaumotte, F. (2004). Foreign Direct Investment and Globerman, S., and D. Shapiro (2002). Global Regional Trade Agreements: The Market Size Effect Foreign Direct Investment Flows: The Role of Revisited. International Monetary Fund, IMF Governance Infrastructure. World Development, 30, Working Papers, 04-206, 1-31. 1899-1919. Keller, K. R. I. (2006a). Investment in Primary, Graham, E. M. (2005). Do Export Processing Zones Secondary and Higher Education and the Effects on Attract FDI and its Benefits? Experience from China Economic Growth. Contemporary Economic Policy, and Lessons for Russia. In: Graham, E. M.; Oding, 24, 18-34. N., and Welfens, P. J. J., eds. Internationalization Keller, K. R. I. (2006b). Education Expansion, and Economic Policy Reforms in Transition Expenditures per Student and the Effects on Growth Countries, Berlin, Heidelberg, and New York, in Asia. Global Economic Review, 35, 21-42. Springer, 251-272. Knack, S., and P. Keefer (1998). IRIS-3. File of Greene, W. H. (1997), Econometric Analysis, Third International Country Risk Guide (ICRG) Data, Third Edition. Upper Saddle River, NJ: Prentice Hall. Edition, College Park, IRIS, distributed by East Griffith, Winston H. (2005). Can Caribbean Syracuse, The PRS Group, Inc. Education Attract Knowledge-Based Foreign Direct Kumar, N. (1999). Labour Abundance and Global Investment? Journal of Economic Issues, 39, 973-93. Patterns of Investments and Trade by Multinational, Grogan, L., and L. Moers (2001). Growth Empirics Implications for India. Journal of Labour Economics, with Institutional Measures for Transition Countries. 42, 969-979. Economic Systems, 25, 323-344. Liu, X., C. Wang, and Y. Wei (2001). Causal Links Gubitz, A. (1991). Impact of Investment Policies on Between Foreign Direct Investment and Trade in German Direct Investment in Developing Countries, China. China Economic Review, 12, 190-202. an Empirical Investigation. The World Bank, Policy Liu, X., P. Burridge, and P. J. N. Sinclair. (2002). Research Working Paper Series, 718, 1-40 Relationships Between Economic Growth, Foreign Hansen, H., and J. Rand (2006). On the Causal Links Direct Investment and Trade: Evidence from China. Between FDI and Growth in Developing Countries. Applied Economics, 34, 1433-1440. World Economy, 29, 21-41. Morisset, J. and N. Pirnia. (1999). How Tax Policy Hejazi, W., and P. H Pauly (2005). How Do Regional and Incentives Affect Foreign direct investment, A Trade Agreements Affect Intra-regional and Inter- Review. The World Bank, Policy Research Working regional FDI? In: Eden, L., and W. Dobson, eds. Paper Series, 2509, 1-29. Governance, Multinationals and Growth; New Neary, J. P. (2006). Trade Costs and Foreign Direct Horizons in International Business. Cheltenham, Investment. Centre for Economic Policy Research U.K. and Northampton, MA: Edward Elgar, 176-208. C.E.P.R. Discussion Papers, 5933, 1-22. Hon, T.-Y., C.-C. Poon, and K.-Y. Woo (2005). Noorbakhsh, F., A. Paloni, and A. Youssef (2001). Regional Distribution of Foreign Direct Investment Human Capital and FDI Inflows to Developing in China, A Multivariate Data Analysis of Major Countries, New Empirical Evidence. World Socioeconomic Variables. Chinese Economy, 38, 56- Development, 29, 1593-1610. 87.
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Pantulu, J., and J. P. H. Poon (2003). Foreign Direct World Bank (2001) World Development Indicators Investment and International Trade, Evidence from 2001. CD-Rom Data set. Washington D.C.: World the US and Japan. Journal of Economic Geography, Bank, International Bank for Development and 3, 241-259. Reconstruction. Qui, L. D. and Z. Tao (2001). Export, Foreign Direct World Bank (2003) World Development Indicators Investment, and Local Content Requirement. Journal Online. Washington D.C.: World Bank, International of Development Economics, 66, 101–125. Bank for Development and Reconstruction. Rossotto, C., K. Sekkat and A. Varoudakis (2005). World Bank (2004) World Development Indicators Opening Up Telecommunications to Competition and 2004. CD-Rom Data set. Washington D.C.: World MENA Integration in the World Economy. Journal Bank, International Bank for Development and of International Development, 17, 931-955. Reconstruction. Singh, H. and K. Jun (1999). Some New Evidence on Xing Y., and C. Kolstad. (2002). Do Lax Determinants of Foreign Direct Investment in Environmental Regulations Attract Foreign Developing Countries. The World Bank, Policy Investment? Journal of Environmental and Resource Research Working Paper Series, 1531, 1-44. Economics, 21, 1-22. Wei, W. (2005). China and India: Any Difference in Zhang, K. H. (2001). How Does Foreign Direct Their FDI Performances? Journal of Asian Investment Affect Economic Growth in China? Economics, 16, 719-736. Economics of Transition, 9, 679-693. Weinstein, D. (1996). Structural Impediments to Zhang, K. H. (2005). How Important Are Host- Investment in Japan, What Have We Learned over Country Markets for Multinational Corporations? the Last 450 Years? In: Yoshitomi, M. and E. M. Evidence from Cross-Country Data for 1990-2003. Graham, eds. Foreign Direct Investment in Japan; Economia Internazionale / International Economics, 58, 507-520. Cheltenham, U.K., Brookfield, VT: Edward Elgar, 136-172. Zhang, Q., and B. Felmingham (2001). The Relationship between Inward Direct Foreign World Bank (1998). World Development Indicators Investment and China's Provincial Export Trade. 1998. CD-Rom Data set. Washington D.C.: World China Economic Review, 12, 82-99 Bank, International Bank for Development and Reconstruction.
Katarina Keller is assistant professor of economics at the Susquehanna University Sigmund Weis School of Business. She received her Ph.D. in economics from the University of Notre Dame. Her research interests include economics of education, economic growth and development, technological change, income distribution and economic policy.
Andrew Gilbert is an associate with PricewaterhouseCoopers' Washington Federal Practice in McLean, VA. He received a bachelor of science in business administration with a finance emphasis and a bachelor of arts in economics from Susquehanna University. His research interests include international trade and finance, as well as social security and governmental accounting.
Anne Stankiewicz is currently an analyst in Goldman, Sachs & Co's Prime Brokerage Group in New York. She graduated from Susquehanna University with a double major in economics and business administration: finance
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emphasis. Her other research interests include international trade and FDI, especially in emerging markets, as well as antitrust law.
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A CORRELATION ANALYSIS OF PRICE OF CORN AND PRICE OF GASOLINE Joseph Cheng, Ithaca College
ABSTRACT
Corn price has risen dramatically in recent years because of its usage as a source for bio-renewable fuel. Ethanol is derived from corn and is an alternative substitute for gasoline. As gasoline price rise, ethanol becomes more economically viable, raising the demand for corn.
This paper examines the relationship between corn and gasoline price with statistical analysis of corn futures price and gasoline futures prices. Regressions are performed on daily price changes for both commodities. It is found that corn price is only indirectly correlated with gasoline prices and that the removal of ethanol subsidy might cause gasoline price to rise about 12 cents per gallon.
INTRODUCTION The Energy Policy Act of 2005 requires that 4 billion gallons of "renewable fuel" be used in 2006 and this According to Wikepedia, ―almost half of Brazilian requirement will grow to a yearly production of 7.5 cars are able to use 100% ethanol as fuel, which billion gallons by 2012. includes ethanol-only engines and flex-fuel engines. Flex-fuel engines are able to work with all ethanol, In the United States, ethanol is most commonly all gasoline, or any mixture of both. Brazil supports blended with gasoline as a 10% ethanol blend this population of ethanol-burning automobiles with nicknamed "gasohol". This blend is widely sold large national infrastructure that produces ethanol throughout the U.S. Midwest, and in cities required from domestically grown sugar cane. Sugar cane not by the 1990 Clean Air Act to oxygenate their only has a greater concentration of sucrose than corn gasoline during the winter. (by about 30%), but is also much easier to extract. The bagasse generated by the process is not wasted, As reported in "The Energy Balance of Corn Ethanol: but is utilized in power plants as a surprisingly an Update," the energy returned on energy invested efficient fuel to produce electricity. EROEI for ethanol made from corn in the U.S. is 1.34 (it yields 34% more energy than it takes to World production of ethanol in 2006 was 51 billion produce it). Input energy includes natural gas based liters, (13.5 billion gallons), with 69% of the world fertilizers, farm equipment, transformation from corn supply coming from Brazil and the United States.[ or other materials, and transportation. However, other researchers report that the production of ethanol The United States fuel ethanol industry is based consumes more energy than it yields. largely on maize. According to the Renewable Fuels Association, as of November 2006, 107 grain ethanol Lately criticism and controversy has been growing biorefineries in the United States have the capacity to over the massive subsidies that some companies have produce 5.1 billion gallons of ethanol per year. An been receiving for ethanol production, including "the additional 56 construction projects underway (in the bulk of the more than $10 billion in subsidies to U.S.) can add 3.8 billion gallons of new capacity in Archer-Daniels-Midland since 1980," according to the next 18 months. Over time, it is believed that a the CATO institute. Recent articles have also blamed material portion of the ~150 billion gallon per year subsidized ethanol production for the nearly 200% market for gasoline will begin to be replaced with increase in milk prices since 2004, although that is fuel ethanol. disputed by some.
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Oil has historically had a much higher EROEI than Imported ethanol is largely prevented from agriculturally produced ethanol, especially from entering the U.S. thanks to a 54-cent-per- petroleum deposits accessible by land, but also from gallon tariff. Two Iowa State University those that only offshore drilling rigs can reach. Apart economists estimate that if this import tariff from this, the amount of ethanol needed to run the were removed, domestic ethanol prices
United States, for example, is greater than its own would drop by about 18 percent. farmland could produce, even if fields now used for Corporate agricultural industry giants food were converted for production of non-food- Archer Daniels Midland, Ethanol Products, grade corn. It has been estimated that "if every bushel and the Renewable Products Marketing of U.S. corn, wheat, rice and soybean were used to Group control two-thirds of all ethanol produce ethanol, it would only cover about 4% of production; more than 90 percent of all
U.S. energy needs on a net basis." ethanol is controlled by just eight firms. U.S. ethanol from corn costs $1.05 per In the United States, preferential regulatory and tax gallon to produce, while Brazilian ethanol treatment of ethanol automotive fuels introduces from sugar cane costs 81 cents per gallon to complexities beyond its energy economics alone. produce. U.S. ethanol production from corn, North American automakers have in 2006 and 2007 per acre, yields about 400 gallons; Brazilian promoted a blend of 85% ethanol and 15% gasoline, ethanol production from sugarcane, per acre, marketed as E85, and their flex-fuel vehicles, e.g. yields about 590 gallons. GM's "Live Green, Go Yellow" campaign. The Ethanol cannot replace current gasoline apparent motivation is the nature of U.S. Corporate consumption. As a Princeton economist Average Fuel Economy (CAFE) standards, which points out, even if we met the President‘s give an effective 54% fuel efficiency bonus to goal of 60 billion gallons of ethanol by 2030 vehicles capable of running on 85% alcohol blends that would merely put a dent in the projected over vehicles not adapted to run on 85% alcohol increase in fuel consumption between now blends.‖ and then doing nothing to decrease our Hurt, Tyner, and Doering (2006) estimated that a dependence on oil. gallon of ethanol will only do about 70% of the work University of Minnesota researchers of a gallon of gasoline. Therefore, the energy value of estimate that converting the entire U.S. corn crop into ethanol would reduce fossil fuel ethanol should be about 70% of the wholesale price of gasoline. use by only 2.4 percent. Meanwhile, this would increase the cost of feedstocks for Subsidy on Ethanol poultry, beef, and pork.‖
According to the March 2007 issue of Taxpayers for Elobeid and Tokgoz (2006) estimated that the Common Sense titled ―Ethanol Subsidies: Too Much removal of trade distortions and 51¢ per gallon tax for Too Little‖, ―corn is a very inefficient source of credit to refiners blending ethanol will induce a 16.5 ethanol. Reasons given are as follows: percent increase in the world ethanol price.
Various tax credits and incentives for STATISTICAL ANALYSIS ethanol will cost taxpayers an estimated Using monthly data 2000-2006 from EIA/DOE, Hurt, $6.3–$8.7 billion dollars annually between Tyner, and Doering (2006) estimated that the 2006 and 2012 .This cost is due largely to a relationship between crude oil price and gasoline federal 51-cent-per gallon excise tax credit price to be: that refiners receive for meeting the federal Renewable Fuels Standard (RFS) mandate. Wholesale gasoline price ($/gal.) = 0.3064 + 0.03038 *crude oil price ($/bbl.)
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They found that the results are remarkably stable gasoline is weaker than that between ethanol and across various periods. Now that ethanol is used as a gasoline. Thus, an alternative regression where component for gasoline, gasoline price might be ethanol is used as the independent variable instead of affected by corn price. To analyze the correlation corn is performed. between gasoline price and corn price, a regression of gasoline price on crude and corn prices is performed UNLEAD= -.543 +.028*OIL + .23*ETHAN (2) in this paper. Crude Oil, gasoline, and corn futures (48.06) (7.51) are traded on a daily basis and thus daily prices for R-squared = .929494 these commodities can be obtained readily. Gasoline Based on the estimated coefficient for oil in Equation and ethanol may be viewed as final products, whereas 2, an increase of one dollar per barrel of crude oil crude oil and corn may be viewed as intermediate or would lead to about 2.83 cents per gallon. raw products. Since it might take a few weeks for refineries to refine crude oil into gasoline and also a Note that the coefficient for ethanol is statistically time period for distillers to transform corn into significant. His suggests that the statistical link ethanol, it make sense to use December futures for between ethanol and gasoline is much more direct crude and corn, and January futures for gasoline and than that between corn and gasoline. The coefficient ethanol. The one month difference in contract for Ethanol is .23, which means that a one dollar per expiration provides a more accurate pricing gallon increase in the price of ethanol would lead to correspondence between the intermediate products an increase in the price of gasoline per gallon by and the final products. Specifically, the data used for about 23 cents. statistical analysis are daily closing prices for December 2007 Corn futures, December 2007 Crude If the 51 cents subsidy (tax credit) for domestic oil, January 2008 Gasoline, and January 2008 ethanol refiners is removed, then this could cause Ethanol. gasoline price rise by about 12 cents per gallon, which is derived by multiplying the coefficient for Given that gasoline in the U.S. comprise about 10% ETHAN by .51. (.51 x .230762). However, if a ethanol, which in turn is derived from corn. It makes totally free market were to hold for ethanol, not only sense to specify a linear regression for unleaded the subsidy needs to be removed, but also the tariff gasoline as a function of crude oil price and corn on ethanol imports needs to be removed as well. price. The removal of tariff on ethanol will reduce the ethanol price, which should partially offset the price The price of gasoline is affected by both cost and increase caused by the removal of the subsidy for demand. The regression functions in this paper may domestic refiners. be considered as cost functions since gasoline prices are specified as function of price of inputs, including To estimate the effect of corn price changes on the crude oil and ethanol. Since ethanol is derived from price of ethanol, ethanol price is regressed as function corn, one might specify gasoline price as function of of corn prices: crude oil and corn: ETHAN = .961924 + .00218475*CORN (3) UNLEAD= a + b1 * OIL + b2*CORN (1) (7.80) UNLEAD= .1477 + R-squared = .235288 .0255 * OIL + -.00024*CORN (35.35) (-1.45) R-squared = .910253 The product of the coefficient for ethanol (.230762) in Equation 2 and that of the coefficient for corn in Based on the t-statistics, the coefficient for corn Equation 3 (.00218475) is .050416, which means price in (1) is not statistically significant. This might that a one dollar per bushel increase in the price of be due to the fact the statistical link between corn and
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corn would lead to about 5 cents increase per gallon REFERENCES in the cost of gasoline. If corn were to be utilized even more in the future for making ethanol, then the Elobeid, A, and Tokgoz. S. (2006). Removal of U.S. demand for corn will rise, causing the price of corn to Ethanol Domestic and Trade Distortions: Impact on rise correspondingly, which in turn will make corn U.S. and Brazilian Ethanol Markets less economically attractive as an alternative source Working Paper 06-WP 427 Center for Agricultural for biofuel. However, if crude oil price continues to and Rural Development, Iowa State University increase, corn might still remain an attractive intermediate product for the manufacturing of Hurt C.,Tyner W., and Doering O. (2006), gasoline. Economics of Ethanol: Economics of Ethanol, Department of Agricultural Economics, Purdue University
―Ethanol Subsidies: Too Much for Too Little‖ Taxpayers for Common Sense, March 2007
http://en.wikipedia.org
Ethanol
Joseph Cheng is an associate professor and chair of finance and international business at Ithaca College.
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IS THERE A RELATIONSHIP BETWEEN CORRUPTION AND JOB CREATION IN RESOURCE RICH OIL AND GAS DEVELOPING COUNTRIES? Olumide Ijose, Slippery Rock University of Pennsylvania Jesus Valencia, Slippery Rock University of Pennsylvania
ABSTRACT
Though the relationship between corruption and development has attracted increased research attention in the last 5 years, past research has not segmented developing countries in a unique manner in examining this relationship. Using data from the Economic Intelligence Unit, Transparency International and the Heritage Foundation, this paper examines the relationship between corruption and employment growth in oil rich developing countries between the 1999 and 2006 time period. The period was selected as it represents an era of high oil and gas prices and in theory, an enhanced ability to create jobs. The paper will deepen our understanding of the impact of corruption on employment in emerging resource rich countries.
INTRODUCTION natural resources. Gylfason (2001) for instance, points to a dearth of investment in human capital, Sachs and Economies are hard pressed to create good jobs at a Warner (2001) argue that natural resources tends to reasonable clip, if their resources are sub-optimally crowd out manufacturing, while Kronenberg (2004) utilized. Since corruption creates inefficiencies, there contends that natural resource rich countries are plagued should be a direct relationship between job creation and by rent seeking behavior and widespread corruption that the incidence of corruption. Corruption is however but negatively affects their economic performance. one force impacting job creation. The openness of an economy also impacts its ability to create jobs. If it is Empirical work on the relationship between corruption, true, that the more institutionalized corruption is in an economic openness and jobs in oil and gas rich emerging economy, the less open it becomes, it means that ceteris countries has been limited. This paper analyses this paribus, the more corrupt a country is, the less relationship, using corruption estimates from competitive it becomes, and the more constrained its Transparency International, measures of economic ability to create jobs becomes. openness from Heritage Foundation and employment data from Economic Intelligence Unit. The relationship between natural resources and slow economic growth in emerging economies has been well We opted to study employment growth in the period demonstrated (Sachs and Warner, 1995, Gylfason, 2001). between 1999 and 2006 as this represents a period of Likewise the negative correlation between slow economic significantly increased earnings for oil and gas endowed growth and job creation has been well documented. This countries. The countries studied were selected, based on finding is counter to classic economic theory which holds the fact that sales from crude oil represent a majority of that ceteris paribus, the more abundant the supply of their earnings and also because of the existence of natural resources in a country, the better for the country‘s reliable data. This meant that a lack of consistent data led economy. It is a fact that today, aside from the United to the exclusion of interesting countries such as Nigeria, States, the rich countries and the emerging economies do Iran, Iraq, Kuwait and Angola from the study. To control not possess an abundant stock of natural resources. for the level of development in the selected countries, we included Norway, a developed country, endowed with Most economists agree that a plausible reason for the huge oil and gas deposits, in the regression equation. We seeming contradiction is that, other important job creating reason that everything being equal, given the significant factors tend to be crowded out in countries with abundant
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increase during the period under review, the selected corruption impact negatively on static efficiency, countries should demonstrate significant gains in investment and growth (Romer, 1994, Mauro, 1995, employment. Tanzi, 1998, Leite and Weidman, 1999).
Section 2 of this paper provides a brief overview of the METHODOLOGY literature on corruption and economic openness and how they may affect job creation. The next section describes Data Sources the data methodology used in the regression analysis. In The unit of analysis for the study was an oil and gas section 4, we discuss the regression results and present producing country, with a country defined as a distinct concluding remarks in section 5. autonomous entity, able to take independent decisions on WHAT IS CORRUPTION? the structure of its internal institutional environment and its domestic economic, social and political policies. The conceptualization of corruption in this paper includes Longitudinal data was collected for the period between all of it economic forms, public and private. Public sector 1999 and 2006 from the websites of Transparency corruption, includes activities such as the blatant use of International, Economist Intelligence Unit and Heritage public money for private gain such as trade mispricing Foundation. Data was collected for the following where public contracts are over-invoiced for private gain countries: Algeria, Kazakhstan, Mexico, Norway, Russia and the payment of bribes to a public official to gain and Venezuela. undue advantage such as evading taxes, winning a competitive contract, winning a tender offer, winning a Dependent Variable privatization bid, or winning access to a license to exploit The dependent variable for the study was employment natural resources. Private sector corruption includes, growth. Data for the variable was collected from the over-invoicing of import transactions as a tool for Economist Intelligence Unit for the period between 1999 facilitating transfer payments, evading taxes or to conceal and 2006 and indicates yearly changes in job creation. illegal payments, under-invoicing of import prices to Analysis was done by pooling the individual country reduce import duties, to avoid paying taxes or to foster data. Countries are presumed to constitute relatively capital flight (de Boyrie, Pak and Zdanowicz, 2004). homogenous economic/political entities, thus they are the Though corruption is an age old problem (Bardham, logical units within which to identify variations in the 1997), there are divergent views on how it has impacted independent variable, and to assess the impact of these national economies. Some researchers (Leff, 1964, variations on job creation. Huntington, 1968, Lui, 1985, Lien, 1986) have argued Independent Variables that corruption has an efficiency effect in developing countries where bureaucracies tend to distort efficient Nine indicators of a country‘s ability to create jobs were economic activities and to hinder entrepreneurial identified from the Heritage Foundation‘s Index of behavior as practiced in western market economies. In Openness, Transparency International‘s Corruption essence, these researchers argue that corruption should Perceptions Index (CPI) and the Economist Intelligence have a positive effect on economic growth and Unit Country Reports database. These indicators include employment. A second group (Rose-Ackerman, 1978, variables measuring economic freedom, corruption and Shleifer and Vishny, 1993) contends that the impact of economic growth. As the extent of a country‘s economic corruption depends on the nature of government. That openness, level of corruption and rate of economic corruption hinders growth in countries where power is growth is expected to affect job creation, each measure is decentralized but not in countries where power is expected to correlate with employment growth. centralized. Shleifer and Vishny (1993) use this argument in contending that the increase in corruption in Russia Retroactively analyzing the effect of economic openness, post the communist Soviet Union was due to the ensuing corruption and economic growth on employment growth decentralization of corruption. A third group, argue that in selected natural resource rich countries, will help in
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understanding how these countries in general can Our interest in this study is on the impact that corruption leverage their natural resource wealth to create jobs. has in general on the ability of countries to generate From this understanding comes different theoretical, employment. This of course meant that employment empirical and policy making attributes, which will inform growth (empgrwt) will be our dependent variable. The future theoretical, empirical and policy making activities. independent variables comprising our data set were named as follows: The measurement of each of the nine variables is briefly described below. Gdpch = percentage change in GDP Business Freedom: ―The ability to create, Corrupt = corruption index operate and close an enterprise quickly and easily.‖ Regul = freedom from regulation index (business Trade Freedom: ―A composite measure of the freedom) absence of tariff and non-tariff barriers that affect imports and exports of goods and Trade = trade freedom services.‖ Monetary Freedom: ―Combines a measure of Fiscal = a measure of the burden of government from the price stability with an assessment of price tax revenue side. controls.‖ Govinterv = a measure of the degree of freedom from Freedom from Government: ―Includes all government. government expenditures, including consumption and transfers.‖ Monpolcy = a measure of price stability and absence of Fiscal Freedom: ―A measure of the burden of price controls. government from the revenue side. The measure includes both tax burden and the overall amount Invest = a measure of investment freedom – how freely of tax revenues as a proportion of GDP.‖ capital can flow. Property Rights: ―An assessment of the ability of Finance = a measure of financial freedom: banking individuals to accumulate private property security and freedom from secured by clear laws that are enforced by the banking regulation state.‖ Investment Freedom: ―An assessment of the free According to economic theory, the creation of jobs is of flow of capital especially foreign investment.‖ course primarily a function of the growth of gross Financial Freedom: ―A measure of banking domestic product (GDP) – the more output the economy security as well as independence from generates the more manpower it needs. We see corruption government control.‖ then as a force in itself which reduces the effectiveness of Gross Domestic product Per Capita: GDP in GDP for it siphons funds from GDP which would US$ per capita at current prices and exchange otherwise be employed productively. rates Any attempt to measure the effect of corruption has to be (Source: Heritage Foundation 2007) done directly and not via its effect on GDP. We thus posit the following estimating equation: STATISTICAL ANALYSIS Our data consisted of 10 variables collected on 6 Empgrwt = + (gdpch ) ( corrupt ) ( regul ) ( trade ) ..... ( finance ) countries during 9 years for a total of 540 observations. i,t 1it , 2 it , 3 it , 4 it , 9 itiit , , Our data is referred to in the econometric literature as 'i' refers to country i and 't' refers to year t. panel data or longitudinal data. Since a couple of observations were missing our data is by necessity The term i corresponds to the country specific term referred to as an unbalanced panel. that would define a different intercept equation for
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BETTER RESULTS country i. The term i on the other hand represents an assumed standard normally distributed error term with The most likely cause of the poor performance of our expected zero mean and standard deviation equal to 1. initial results is the high degree of collinearity of our independent variables. Most of the freedom indexes used A fixed effects estimator was used to estimate equation 1. have lots in common and rob each other of significance Our fixed effects estimator was by necessity a country- when trying to explain employment growth. A decision fixed effects estimator. This is so because our 9 was made to drop the worst performers from our initial independent variables are variables which are likely to equation – namely: trade, govinterv, and finance. We also differ across countries but which will change little over decided to model corruption separately rather than use it the 9 years studied by our data. More precisely, a directly in our estimating equation. This forced us to use country‘s level of corruption, level of trade freedom, an instrumental variable approach for corruption in hopes fiscal freedom, monetary freedom, etc., are country of detecting its indirect effect on the creation of characteristics which are more likely to stay constant over employment for each country. The two equation model the period studied but which can easily differ among the that resulted from this approach necessitated the use of a countries studied. two-stage least squares estimating procedure. The model that resulted looked as follows: The theory of fixed effects, of course, assumes more than that. It also assumes that country-specific variables Empgrwt = + (gdpch ) ( monpolcy ) ( invest ) ( Corrupt ) relevant in explaining employment but not appearing in 1it , 2 it , 3 it , 4 itiit , , our data, such as a country‘s share of the oil market, a Corrupti, t + 1 ( regul ) i , t 2 ( monpolcy ) i , t i , t country‘s view of women‘s role in the marketplace, etc. will remain constant over the time studied. Table 2 Summary of Better Regression Results INITIAL RESULTS Empgrwt Coeff. Z p>| t | Table 1 shows the results of estimating equation. The Corrupt 0.126 0.82 0.410 signs on most of the coefficients are as would be Gdpch 0.188 1.75 0.080 expected from economic theory, though their level of Monpolcy 0.131 3.17 0.002 statistical significance is disappointing. The only Invest 0.090 2.25 0.025 significant effects are those for monetary freedom and for investment freedom. The coefficient on corruption not ANALYSIS OF THE RESULTS only has the wrong sign it is also statistically All coefficients including the one on corruption not only insignificant. have the correct sign, they are all statistically significant Table 1 but for the exception of the coefficient on our Summary of Initial Regression Results instrumented index of corruption. The latter being significant only at the 59% level of significance. Empgrwt Coeff. t-statistic p>| t | Gdpch 0.196 1.56 0.127 CONCLUSION Corrupt -0.045 -0.81 0.425 Regul -0.035 -0.94 0.355 There is little doubt that economic openness has an Trade -0.069 0.88 0.382 impact on job creation among the group of oil and gas Fiscal -0.134 -0.92 0.366 producing countries studied. Consistent with the rent Govinterv. -0.028 0.34 0.738 seeking literature, the results demonstrated the expected Monpolcy 0.171 3.52 0.001 relationship between corruption and employment Invest 0.080 1.86 0.071 creation. However, the relationship was not statistically Finance 0.027 0.68 0.502 significant. This may be because of the static nature of the incidence of corruption in these countries and the
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possibility that corruption perceptions tend to change Leff, N. (1964). Economic Development Through slowly. Another possibility could be low data quality Bureaucratic Corruption. The American Behavioral since data could not be found for many of the oil and gas Scientist: 8(2), 8-14. endowed countries. However, it is impossible to ascertain what the results would have been had good quality data Lien, D. (1986). A Note on Comparative Bribery Games. been available on all oil and gas dominated economies. Economic Letters: 22, 337-41. As such, the rent seeking literature‘s presumption that a Leite, C. and Weidman, J. (1999). Does Mother Nature positive relationship exists between corruption and job Corrupt? Natural Resources, Corruption and Economic creation is weakly supported. Growth. IMF Working Paper WP/99/85. REFERENCES Lui, F. (1985). An Equilibrium Queuing Model of Bardham, P. (1997). Corruption and Development: A Bribery. Journal of Political Economy: 93(4), 760-81. Review of the Issues. Journal of Economic Literature: Mauro, P. (1995). Corruption and Growth. Quarterly XXXV, 1320-1346. Journal of Economics: 11093, 681-712. de Boyrie, M., Pak, S.J., and Zdanowicz, J. (2004). Romer, P. (1994). New Goods Old Theory and the Money Laundering and Income Tax Evasion: The Welfare Costs of Trade Restrictions. Journal of Determination of Optimal Audits and Inspections to Development Economics: 43(1), 5-38. Detect Abnormal Prices in International Trade. Journal of Financial Crime: 12:2, 123-130. Rose-Ackerman, S. (1978). Corruption: A Study in Political Economy. New York: Academic Press. Gylfason, T. (2001). Natural Resources, Education and Economic Development. European Economic Review: Sachs, J.D. and Warner, A.M. (2001). The Curse of 45(4-6), 847-859. Natural Resources. European Economic Review: 45(4-6), 827-838. Huntington, S. (1968). Political Order in Changing Societies. New Haven: Yale University Press. Shleifer, A and Vishny, R. (1993). Corruption. Quarterly Journal of Economic, 108(3), 599-617.
Tanzi, V. (1998). Corruption around the World: Causes, Consequences, Scope and Cures. IMF Staff Papers: 45(4), 559-94.
Olumide Ijose is an associate professor at Slippery Rock University of Pennsylvania
Jesus Valencia is a n assistant professor at Slippery Rock University of Pennsylvania
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EXECUTION, THE SECRET TO GREAT PERFORMANCE David E. Vance Rutgers University School of Business Camden
ABSTRACT
The difference between average companies and great ones is their ability to execute. Failure to execute is listed as the primary reason that CEOs fail. Execution starts with plans that have specific, clearly articulated goals and assigned responsibility. But wishes become execution only when individuals are held accountable for measurable achievement. Financial and non-financial measures that impact performance should be measured frequently and prompt corrective action taken when goals are not being met. Some companies develop a culture in which failing to meet goals is the norm. This can be changed by successfully completing short interval projects and eliminating managers who can‘t, or won‘t meet goals. Selecting the right people and grooming them with training and field experience is critical to developing a culture of execution. CEOs who execute well are hungry for details and have frequent contacts with workers and customers in addition to scrutinizing performance measures.
INTRODUCTION Table 1 Reasons for Execution Failure
The difference between average companies and great ones is execution. A company that expects and demands Reason Percent great execution year after year will get it. A company that Inadequate or unavailable resources 20.3% only demands great execution sporadically or not at all Poorly communicated strategy 14.1% will not get great execution (Stewart and O‘Brien, 2005). Action plan not clear 12.2% Knowing what must be done; and having equations to No accountability 11.1% model it, is far different from executing a plan. Execution Organizational silos and cultural failure 10.0% is where most companies fail. A Harvard study indicated Inadequate performance monitoring 8.1% that large companies achieve only 63% of their plan goals Inadequate consequences for failure 8.1% every year and a third of companies achieve less than Poor senior leadership 7.0% 50% of plan (Mankins and Steele, 2005). An AMA study Uncommitted leadership 5.1% of CEOs indicated only 3% believed their companies were very successful at executing strategy and 62% Unproven or inadequate strategy 1.9% indicated their ability to execute was moderate or worse Other, including inadequate skills 2.1% (AMA/HRI, 2007). In another survey, companies 100.0% estimated that 60% of planned productivity gains were lost due to failure to execute (Neiman and Thomson, 2004). Lack of execution is a substantial factor in 70% of A company will never have enough resources to do CEO failure (Charan and Colvin, 1999). everything, so one factor in good execution is how well a company matches plans and limited resources. This and EXECUTION SHORTFALLS other reasons for failure are avoidable and can be overcome with discipline and strong leadership. For Why does execution fall short so often? Table 1 Reasons example, one study found less than 15% of companies for Execution Failure lists the eleven most widely cited routinely compare actual results to strategic plans reasons that execution falls short of plans in a study of (Mankins and Steele, 2005). Unless a company companies with sales over $500 million (Mankins and systematically analyzes variances from plan, it is difficult Steele, 2005).
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to tell whether the plans were unrealistic, or whether Executable Plan execution was poor. There can be no accountability without measurement. Strategic plans are often too vague to execute. A strategic plan should set specific goals. If the goals are to sell as Many factors contribute to failure execution. One of the much as possible and cut costs as much as possible and most insidious is a culture of underperformance. When make customers as happy as possible, the company has there is a gap between performance and goals year after no plan. These goals are unexecutable because they not year, with few consequences, management learns to specific enough. expect a performance shortfall. Other factors that contribute to the performance gap include a poorly Executable plans must be realistic. Unrealistic plans formulated plan, misapplied resources, breakdowns in cause people to shut down rather than to stretch. communication and limited accountability for results Executable plans must be adequately funded and staffed (Mankins and Steele, 2005). On the other hand, there are with good people. Plans should be simple, concrete and examples of excellent performance. Combining good measurable (Mankins and Steele, 2005). If the goal is to execution practices with mistake avoidance provides a grow revenue by 20% everyone should know it. Another systematic framework for outstanding execution. plan goal might be to increase gross margin by 5% or to enter a particular market. Each of these high level goals THE PLAN can then be deconstructed into the specific steps that have to be executed at each level of the organization. Plans outline broad goals, set directions for reaching those goals, assign responsibilities and allocate resources. Although responsibility for executing plan elements is Unfortunately, many companies invest a significant assigned down through the organization, the CEO cannot amount of time and energy to develop a plan, put it in a be excused from performance of his or her goals by nice cover, approve it, stamp it, and put it on a shelf. saying the Vice President of Marketing did not meet his Thereafter, it rarely sees the light of day. or her goals. The CEO is responsible for meeting goals no matter what. Likewise the Vice President of Marketing is Plans often suffer from several other maladies as well. responsible for meeting his or her goals no matter what. First, they represent compromises between corporate Each person in authority must take responsibility for the which always wants more, and divisions who want to set performance of those acting under them and to a targets low so that bonuses will flow. Second, budgets significant extent for those in other departments that revolve around what top management wants to hear support their effort. No excuses (Stewart and O‘Brien, rather than what is realistic. For example, some 2005). managements‘ idea of planning is to tweak excel spread sheets until a certain profit number appears. Profit doesn‘t Priorities come from spreadsheets; it comes from meeting customer needs. Third, budgets are used to allocate resources A hallmark of successful plans is that they set priorities. which constrain strategy. The reverse should be in effect. A laundry list of priorities simply dissipates a company‘s Strategy should be developed, and then budgets should be energy. A company must focus on initiatives that are used to communicate resource allocations. If strategy clear, specific and few. The first few priorities selected doesn‘t drive budgets, budgets will drive non-strategic should have the greatest impact on bottom line results and behavior (Sorensen, 2003). On the other hand, good plans growth (Neiman and Thomson, 2004). No new initiatives drive execution (Mankins and Steele, 2005). Good plans should be introduced until the old initiatives become are executable, set priorities, assign responsibility and deeply embedded in the company‘s culture. Jack Welsh, have monitoring build into them. as CEO of GE, only launched five major initiatives in 18 years (Charan and Colvin, 1999).
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Other successful companies focus on just three to five which means sub-task results must be objectively goals every year. For a company in restructuring the measurable. At Dell, every level of management has three goals might be to (i) focus on the customer, this includes to five sub-tasks to perform or goals to meet in support of improving customer service, delivery times, product higher level goals (Stewart and O‘Brien, 2005). Great quality, and talking to former customers about why they CEOs always hold people accountable for meeting their left the company, (ii) cutting overhead, overhead is the commitments (Charan and Colvin, 1999). great killer of companies, (iii) reducing cost of goods sold which is the same as saying increasing gross margin, and Rewards must be aligned with responsibility otherwise (iv) increasing return on invested capital by minimizing rewards will drive non-strategic behavior. If bonuses are the assets the company uses. In subsequent years, the given just for making it through the year, rather than for goals might be to introduce new products, take additional hitting specific numerical goals, effort will be focused on quality control initiatives, or expand into new territories. survival versus execution. The key to keeping good people is to learn how to measure and reward them Clarity & Communication (Bhide, 1986).
There must be absolute clarity as to the company‘s goals Of course the argument against detailed plans with and those goals must be repeated over and over again. specific steps is that it limits flexibility. In the balance Dell, for example, gives presentation after presentation as between the principal of flexibility and specific steps of to its goals, priorities and performance expectations so execution, remember that execution pays the rent, not there was no mistake about what the company wants. To principals. reinforce the message, rewards follow good performance and punishment follows bad performance (Stewart and Time frames & sense of urgency O‘Brien, 2005). At UPS managers meet with their One of the reasons companies fail to execute is employees for exactly three minutes every day to make indecisiveness. Quick action on problems is imperative. sure everyone know the goals and priorities for the day When Lou Gerstner was hired to restructure IBM he (Kaihla, Baltatzis, et al., 2006). focused on execution, decisiveness and simplifying the The habit of clarity of communication must be ingrained organization for speed (Charan and Colvin, 1999). Dell at a deeply cultural level. For example, one practice of believes that a company requires a sense of urgency in successful CEOs is to write down what everyone every thing it does. The notion of investing in the future promised to do and when they promised to do, and at the can become a trap. The future is this afternoon and this end of every meeting, read the list back to make sure evening (Stewart and O‘Brien, 2005). Much of the everyone understand its, and then to send follow up notes success of Silicon Valley companies is attributed to their afterwards (Charan and Colvin, 1999). view that there is no time for committees, meetings and task forces. They have to get things done and products to Responsibility market (Charan and and Colvin, 1999). What counts most in good execution is vigor and nimbleness, or what one Clarity of expectations as to what each employee must might call hustle (Bhide, 1986). do, backed with the knowledge that he or she will be held accountable is the most effective way to drive profit Contingencies improvement. This goal alignment was responsible for doubling one chemical company‘s division profit in a Life never unfolds exactly as planned. However, many single year (Layman, 2005). managers are linear thinkers and set about to achieve goals in a step one, step two step three fashion. When As strategic goals are deconstructed into sub-tasks, each something goes awry with step two, that brings them to a sub-task must be assigned to a specific individual who halt. A good manager will always have two or three ways will be responsible for meeting that sub-task goal. to complete step two so that his or her ultimate Responsibility must be backed up by accountability commitment and goals can be met.
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Contingency planning should not take the form of MEASUREMENT AND MONITORING padding budgets or time estimates. Contingency planning should be about alternative courses of action. The more Accountability must be designed into plans to improve credible alternatives one develops, the more likely one is execution. Accountability requires measurable goals and to reach goals. Adapt. Improvise. Overcome. a systematic means to collect and analyze progress toward goals (Stewart and O‘Brien, 2005). A Culture of Success Key Performance Indicators It is difficult to instill a culture of success in an underperforming company with a demoralized workforce, Everything that can be measured should be measured is but it can be done. Just as failing to meet goals one year an overstatement, but not by much. Everything that increases the likelihood that goals will be missed the next contributes to the company‘s overall goals should be year, and the expectation of fail can become the norm, a measured, not just financial measures, but non-financial culture of success can become the norm. measures as well. For example, quality costs money, inventory costs money and time costs money, so Success begets success. One way to turnaround the measures of quality, inventory and time are critical to a culture is to focus on a number of short interval projects, company making profitability goals (Stewart and those which can be completed in 60 to 100 days. Select O‘Brien, 2005). projects with a high payoff, and for which the payoff can be quantitatively measured. For example, one firm set If a retailer‘s goal is to grow company sales, then it and met the goal of reducing the time from order to should measure sales by store; sales per square foot per installed service by 80% (Neiman and Thomson, 2004). store; sales this year compared to last year; sales per A credit card company set and met the goal of replacing square foot per dollar of rent to determine whether it pays lost cards in two days and reduced customer billing query to rent stores in expensive venues; sales per dollar of time by a third (Bhide, 1986). The demonstration of a assets invested in plant property and equipment; sales per clear impact on profitability is required to turnaround the dollar of inventory investment; the number of customers culture. When a CEO who executes well brings his or her visiting stores; the conversion rate which is the number of habits into a company where they didn‘t exist, attitudes visitors that actually make a purchase; the average begin to change in subtle ways. People are more prepared purchase; the contribution on the average purchase; and for meetings and begin to focus on closing the plan- so forth. These measures should drive store managers to performance gap. They begin to realize that commitment get more customers to the store; focus on customers is everything (Charan and Colvin, 1999). likely to make a purchase; stock more attractive merchandise; offer more impulse buy items; spawn high Successfully completing significant short interval projects contribution sales through better product selection and give people a sense of the possibilities, but not everyone placement; train sales staff to up sell and suggest is likely to have the skill or desire to follow through on accessories to go with purchases. every task. Another aspect of building a culture of success is to continually remind people in presentations Every industry has a key set of metrics that are used to and by other means what is expected of them in a determine performance. In auto manufacturing, it might concrete. Assigning specific responsibilities, deadlines be the number of hours it takes to assemble a vehicle; the and measuring performance is critical to create a culture time it takes to assemble a vehicle; absenteeism; of success. Those who can‘t or won‘t meet their goals overtime; on the job injuries; percentage of vehicles that must go. The first people cut under a regime that insists pass final inspection; warranty claims in the first 90 days; on success will be shocked, but those who remain will get days of unsold inventory; and contribution per vehicle. It the message, and will find ways to improve performance. is important to understand how each of these metrics Dell‘s no excuses policy, is a model for the kind of contributes to the company‘s goals. Measure performance success based culture a company should aspire to and hold people accountable for meeting expectations. (Stewart and O‘Brien, 2005).
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Dell tracts things like new leads, change in margins and see where they are. No one wants to be the last one new customers (Stewart and O‘Brien, 2005). Hewlett around the track or even in the last half of the pack, so Packard tracks more than a dozen variables across its making performance measures widely available can business units including things like real estate cost per stimulate performance (Stewart and O‘Brien, 2005). square foot and operating expenses as a percent of gross margin. They also benchmark themselves against an Management by walking around estimate of their competitors‘ ratios (Kaihla and Baltatzis, Monitoring also means the CEO must make it his or her et. al., 2006). Other companies tract things like sales from business to routinely talk to workers, first line managers new products and number of new products introduced. and customers (Charan and Colvin, 1999). Bloomberg‘s Industry association publications are one place to find new headquarters takes this idea to a new level by placing industry specific metrics. The financial literature is the CEO in a glass office in the middle of the sales and another source. As writers grapple to compare companies customer service floor. This gives him an unprecedented, and sort out the good, the bad and the hopeless, they often real time view of what is going on. Home Depot‘s board report or develop interesting metrics. Company specific members are expected to visit a dozen stores a year and metrics can be developed through an understanding of all report on customer service, merchandise selection, store the sub-activities that roll up to financial performance. appearance and a number of other variables (Kaihla, Regular contact with workers and first line managers Baltatzis, et. al., 2006). might help identify such metrics. This is sometimes called management by walking around For metrics to be consistent and reliable, data should be and it can be useful in collecting intangible information captured and reported on a routine basis. For metrics to about morale, operations, and the market place. It also be useful, they must be timely. The best metrics are those helps provide context to the numbers. Sometimes captured as a byproduct of operations rather than as management by walking around can identify trends, good separate tasks that require staff to fill out forms or make or bad, before they are reflected in the numbers. And computer entries they wouldn‘t ordinarily have to make. sometimes management by walking around generates For example, most of the metrics discussed for retail ideas for new and more relevant measures of stores can be gleaned from computerized inventory and performance. sales data. PEOPLE DEVELOPMENT Annual or even quarterly reports are not useful for Unless a company has the right people, with the right execution management because they are not timely. Even skills and the right attitude, it will not be able to execute monthly reports have limited value. Many companies its plan. GE‘s philosophy is people first, strategy second measure metrics on a weekly basis and some measure key (Charan and Colvin, 1999). The idea is that if one has the metrics like sales and production on a daily basis. Dell, right people, people who can execute well, they will for example, monitors order activity in real time and if achieve good results even if the strategy is inadequate. In fewer orders than expected come in by 10:00 AM, they fact, there are some who say that strategy confers a run a special on their website by 10:15 (Stewart and temporary advantage at most and that true competitive O‘Brien, 2005). Great CEOs are always hungry for advantage comes from superior execution (Bhide, 1986). details that can help improve performance (Charan and Colvin, 1999). But, lower level managers need this kind Selection of feedback as well so they can constantly adjust tactics to meet commitments. Selection of the right people for leadership positions is challenging. Investment banking is an industry in which There is an unfortunate tendency in many the hustle and drive of individual employees makes or underperforming companies to keep information secret. breaks a firm. Therefore it is rare for any professional to This isn‘t healthy. A better approach is to make be hired without an interview with one or more of its everyone‘s metrics available to everyone else so they can managing directors (Bhide, 1986).
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An advantage to promoting internally is that internal debate the best ways to meet performance objectives candidates have a track record that is easier to evaluate (Abetti, 2006). than that of a new hire. Dell, for example has shifted from 75% new hires for leadership positions to 70% internal In addition to building skilled, focused leaders, training promotions (Stewart and O‘Brien, 2005). and education has other benefits. For example, when managers believe a company is interested in their Southwest Airlines begins the interview process with a professional development, they tend to be more dedicated candidate‘s first company contact and documents the and loyal to the company which results in better candidate‘s interaction with every Southwest employee execution and reduced turnover (Stewart and O‘Brien, he or she meets, from reservationists, if they are flying in 2005). for an interview, to secretaries, to flight attendants and human resource staff. Candidates are asked to give CONCLUSION speeches about themselves and the company watches the The difference between great companies and others is of reaction of the other candidates. If they are bored, they the quality of their execution. Good execution begins are probably not the people people they want. Southwest with an executable plans, that is a plan that has well credits this screening process for both superior execution defined goals, clearly articulated, with dates certain for and one of the lowest employee turnover rates in the performance and clear responsibility. One of the airline industry (Kaihla, Baltatzis, et. al., 2006). hallmarks of a good plan is that it sets priorities. Long Training, Coaching, Nurturing lists of plan goals dissipate energy. Shorts lists focus attention. Performance to goals must be measured at short It is rare that anyone is born with all the habits needed for intervals so that corrective action can be taken. Strategy superior execution. Building habits, which is deeply should drive performance, not budgets. If meeting budget ingraining a philosophy and method of operation in a is the goal, that goal will drive unstrategic behavior. person, is far different than sending someone to a seminar. Coaching as well as live experience is required A CEO may inherit a company with a culture of to build habits and discipline (Neiman and Thomson, underperformance; where results are either never 2004). compared to plan or results routinely fall short of plan. One way to change the culture is to focus on short Skills training is also needed. Executives and managers interval projects with measurable results. The success of who don‘t understand profit and loss are in trouble these projects is the first step in changing the culture. (Stewart and O‘Brien, 2005). If they don‘t understand This must be followed by the consistent discipline in how all the elements of a business work together to setting and achieving goals. produce a profit or loss they can‘t help build a top performing company. Top commercial banks understand Performance to goals and rewards must be aligned. this and invest in rigorous training. Some investment Commitment to meeting goals must be the highest virtue. banks put their professional recruits through a year long Those who make commitments should be rewarded, those training program that is the equivalent of a top MBA who don‘t, can‘t or won‘t must be pushed aside. (Bhide, 1986). Measurement and monitoring are two of the keys to good GE has a school for developing it managers throughout execution. Everything that affects a company‘s their careers at Crotonville, New York. Jack Welsh performance should be monitored. This includes both regularly gave lectures there and met informally with financial measures like contribution margin and non- future general managers to listen to their complaints financial measures like the number of leads generated or about bureaucracy and management indecisiveness, and the number of new customers. Performance should be at the same time he provided one-on one coaching. Jack transparent across all divisions so that everyone can see Welsh also ran what he called ―work-out‖ meetings in where they stand. This encourages superior performance. which managers met in open forums to argue, discuss and Secrecy is the enemy of good execution.
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Management by walking around is another important AMA/HRI. 2007. ―Increasing Margins,‖ Contractor‘s source of information. Many aspects of a business cannot Business Management Report, published by the Institute be adequately captured by performance measures and of Management & Administration. May. p.15. Also see: management by walking around can provide context to The Keys to Strategy Execution. AMA/HRI Survey the numbers. Management by walking around includes available at www.amanet.org/research. regular contact with workers, first line supervisors and customers. Bhide, Amar. 1986. ―Hustle as Strategy,‖ Harvard Business Review. Sept.-Oct. pp.59-65, 62. Companies must select people on a number of criteria including drive, commitment to company goals, technical Charan, Ram and Geoffrey Colvin. 1999. ―Why CEOs skills, willingness to be a team player and leadership. Not Fail,‖ Fortune. Vol. 139, Iss. 12. June 21. Cvr. everyone possesses these qualities. Kaihla, Paul and Patrick Baltatzis, Harris Collingwood, Training, coaching and nurturing are important tools for Michael Copeland, Bridget Finn, Susanna Hamner, David management development. They can help build technical Jacobson, Jeff Nachtigal, Erick Schonfeld, Paul Sloan, skills, help people understand how various aspects of the Owen Thomas. 2006. ―Best Kept Secrets of the World‘s company work together to drive performance and provide Best Companies,‖ Business 2.0. Apr. Vol.7 Iss.3 pp82- direction. However, companies should be in the behavior 96. selection business not the behavior modification business. Layman, Susan. 2005. ―Strategic Goal Alignment at CMP People who can‘t, won‘t or don‘t commit to company Technologies,‖ Strategic HR Review. Vol.4 Iss.4 goals or people who can‘t, won‘t or don‘t want to be team May/June. pp.24-27,27. players should be eliminated from the company. Mankins, Michael C. and Richard Steele. 2005. ―Turning In summary, good execution is probably the most Great Strategy Into Great Performance,‖ Harvard important element driving excellent performance, more Business Review. Jul.-Aug. pp.65-72. important than strategy, market position or a number of other factors. Good executions starts with well thought Neiman, Robert A. and Harvey Thomson. 2004. out and specific plans and well defined responsibility and ―Execution Plain and Simple,‖ Canadian Manager. Fall. continues with prompt and detailed measurement and pp17-19, 17. accountability applied on a consistent basis. Sorensen, Dean. 2003. ―The Value Market: Creating REFERENCES Profitable Growth Thorough Consistent Strategy Abetti, Pier A. 2006. ―Case Study: Jack Welsh‘s Creative Execution,‖ Strategic Finance. July. pp.43-49, 48. Revolutionary Transformation of General Electric and the Stewart, Thomas A., and Louise O‘Brien. 2005. Thermidorean Reaction (1981-2004),‖ Creativity and ―Execution Without Excuses,‖ Harvard Business Review. Innovation. Vol.15 No.1, Blackwell Publishing. pp.74-84, March. pp.102-111,106. 78.
David E. Vance is a clinical assistant professor at Rutgers University School of Business Camden.
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SELLING A STATE-OWNED ENTERPRISE IN THE PEOPLE’S REPUBLIC OF CHINA Dan Benson, Kutztown University Roger Hibbs, Kutztown University
ABSTRACT
This paper discusses the privatization efforts of the Chinese government of state-owned enterprises and state-owned hotels since the 1990s. The advantages of privatization are outlined as well as the issues associated with privatization. Then, the privatization process of a hotel in Yantai City is examined through the eyes of the general manager of the hotel and the director of foreign affairs of Yantai City.
PRIVATIZATION SOHs that do operate as effectively and efficiently as The privatization of state-owned enterprises has been foreign owned hotels, but they are few and far going on for over twenty-five years in China. between (2006). In addition to the financial and Although some studies by advocates of state-owned economic problems associated with SOEs, there are businesses show that these (state-owned) businesses additional reasons why SOHs do not perform as well can be efficient as private enterprises, the vast as their privately-owned counterparts. SOHs are majority of studies on the issue show that state- owned enterprises are ―structurally crippled as often operated for non-economic reasons, such as to economic units‖ (Watkins). In the mid-eighties, improve the image of the city. According to Tang et. China began to undergo economic reform that al. the major problem with these hotels is that hotel included a move to a market economy. By the management cannot be separated from state nineteen-nineties the lack of state-owned enterprise ownership (2006). As such, the hotels often serve the (SOE) reform had undermined China‘s development (Cao et. al., 1997). Since then, the government has interests of the local officials rather than responding been privatizing large, small, and medium size to the demands of the market. In addition, like other enterprises at the national, provincial, and city levels SOEs, up to thirty percent of the staff working for of government. In China the privatization record is SOHs are redundant (Watkins). Typical reforms of mixed. Of all SOEs in China, Close to half lose SOEs (including SOHs) included profit sharing money (Cao et. al., 1997). As a result, the non-state sector has become a major factor in the Chinese between the SOE and a fixed salary plus bonuses for economy (Cao et. al., 1997). By the end of 1996 up management (Tang et. al., 2006). As a result, to 70% of all small SOEs in China had been managing for the short term became the norm and privatized (Cao et. al., 1997). many hotels deteriorated (Tang et. al., 2006). There are financial and economic challenges to SOEs According to Tang et. al. ― … the SOHs gradually in China. SOEs have to deal with shrinking budgets have become political toys and sometimes are due to lack of government funding (Cao et. al., 1997). parasites on the local economy for the entertainment This has increased the debt burden of many SOEs of self-indulgence by principles in the local and made them less attractive to investors (Cao et. governments or the local SOEs (2006).‖ This has al., 1997). SOEs that are privatized usually result in layoffs. Ten percent of the urban labor force has made some SOHs hard to sell and as of 2002, sixty- been laid off as a result. If the local government feels three percent of all hotels were still owned by the the affected area cannot absorb the layoffs, state (Tang et. al., 2006). privatization is delayed (Cao et. al., 1997). When SOEs are sold, the new, private owners often State-owned hotels (SOHs) are part of the SOEs make new investments creating profit and growth. A being privatized. Tang et. al. writes that there are large portion of these privatized firms take the form
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of ―stock cooperatives‖ (Cao et. al., 1997). Tang et. purchase shares, even if it means borrowing money to al. (2006) found that when comparing five-star SOHs do so. and five-star foreign-owned hotels the profit per employee for the foreign-owned hotels is 9.2 times The government will appoint the chairman of the the SOHs. A hint as to the effect of the economic Board of Directors. The purchasing company will impact of privately held hotels in China can be seen appoint the deputy chair. The purchasing company in Shanghai, where eleven percent of foreign hotels will determine the operating management. (privately held) accounted for thirty-five percent of Within a period two or three years after the total hotel revenue in 2002 (Tang et. al., 2006). privatization, the government will sell its shares of The Golden Gulf Hotel is a SOH located in Yantai, the company. It will put its shares on the open China. The hotel is currently for sale and is market where the shares can be purchased by existing undergoing the privatization process. The general employees, the current owner, or outside investors. manager of the Golden Gulf and the director of At that point, if the hotel is successful, the foreign affairs of Yantai City were interviewed government can realize a positive return on the initial relative to this process. stock purchase. The company buying the Golden Gulf would only be buying the building and not the THE STATE-OWNED ENTERPRISE land. At this point, the government owns the land The Golden Gulf Hotel is located on the Yellow Sea and private individuals cannot. The hotel would in Yantai City. To the right of the hotel are rocky come with a long-term lease. bluffs. To the left is a boardwalk that goes on for BENEFITS OF PRIVATIZATION several miles along the sea. The Golden Gulf is one of probably the two nicest hotels in Yantai. It has the From the point of view of Mr. Liu, there will be a advantage, compared to the other hotel, of being right number of benefits to the privatization of the Golden at the water‘s edge. Gulf. One benefit will be the opportunity to reduce the debt load of the hotel. All of the money used to The Golden Gulf is a modern hotel, built in the build the hotel came from government debt on which 1980‘s. The Golden Gulf has 271 rooms, six the hotel must pay interest. The capital that will restaurants, meetings rooms for conferences, and the come from the sale of stock will be used to reduce the kinds of amenities, such as gift shops, piano bar, and debt and thus lower a significant part of the operating spa that you would expect in a five star hotel. expenses. Another benefit of the privatization will be Discussed below are some of the issues related to the a change to the management system. For the general privatization of this SOH. manager (GM), the privatization will lead to a new reporting structure. Currently, the GM has the final STRUCTURE OF THE PRIVATIZATION say in operating issues. He does not get input about The privatization will result in forty-five percent of hotel related issues from the government. With the the stock being held by the buyer of the hotel. privatization, there will be a Board of Directors to Another forty-five percent of the stock will be owned report to as well as a CEO and other Vice-Presidents, by the government. The remaining ten percent of the from whom he could seek advice on strategic and stock will be owned by the employees. All three operating decisions. Mistakes can be spotted sooner. hundred seven employees of the hotel will be given A larger management structure will allow more the opportunity to buy shares in the new corporation. opportunities for upward mobility for talented The general manager of the Golden Gulf, Mr. Liu, workers. As a result, the hotel will be able to attract felt that most of the hourly employees would not be better employees. able to afford the price of the shares. He also stated that current management would be required to With privatization will also come more opportunity to change operating methods. Mr. Liu was looking
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forward to being able to implement ―Western The Golden Gulf is the nicest ―old‖ hotel in Yantai. Management‖ methods that will be less bureaucratic, As a result, it is seen as a sentimental symbol of the more flexible, and hopefully improve efficiency. old way of doings things. There is resistance to change on that basis. A third possible benefit of privatization could come from the employee stock ownership. Mr. Liu felt that Process of Privatization having employees also being part owners would improve their motivation, allow for participation in The decision to sell the Golden Gulf started within management in management decisions, and concern the regional government of Yantai. Once the for the success of the hotel. decision was made to sell, the books had to be audited for the benefit of the potential buyer. The Concerns about Privatization next step was to get offers from potential buyers.
There are a variety of concerns about privatization. Once a buyer was selected, then the sale would have One concern is stability. According to Mr. Yuankun to be cleared through the Commission for Public Sun, Director of the Foreign Affairs Ministry in Property Administration. Yantai, the government does not want someone to come in, buy the hotel, and then resell the hotel for a REFERENCES quick profit. According to Mr. Sun, that had been a Cao, Y. et. al., (December 1997) ―From Federalism, problem with privatization efforts in southern China. Chinese Style, to Privatization, Chinese Style.‖ The government is looking for an owner who will Stanford Economics Working Paper No. 97-049. have a long-term commitment to the hotel. Another Unpublished manuscript. concern is that the purchase price will not be high enough to pay off the debt used to build the hotel. Liu, M. Personal Interviews, 2006-2007 time period. An additional concern deals with human resource management (HRM) issues. Sun, Y. Personal Interviews, 2006-2007 time period.
One HRM issue cited by Mr. Sun is staffing levels. Tang, F.F. et. al., ―Ownership, Corporate The hotel currently has approximately three hundred Governance, and Management in the State-Owned employees. The government did not want a new Hotels in the People‘s Republic of China.‖ Cornell owner to come in and immediately slash the number Hotel and Restaurant Administration Quarterly. May of employees. That would be a public relations 2006: 182-190. problem for the government. Another HRM issue Watkins, T. ―Privatization in China.‖ San Jose State was the possible reaction of the employees in the University. On the internet at event of large-scale changes. If a new owner came in www.sjsu.edu/faculty/watkins/privchina.htm. with new methods, it was felt that the older workers Unpublished manuscript. would provide significant resistance to change. Another HRM concern was that the workers would not want to work for a capitalistic organization rather than the state-owned enterprise.
Dan Benson is an associate professor of management atKutztown University
Roger Hibbs is an associate professor of management at Kutztown University
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EFFECTIVELY ADDRESSING ENTERPRISE COMPLIANCE RISK John A. Kruglinski, Kutztown University of Pennsylvania
ABSTRACT
Compliance with applicable laws and regulations is a core objective of the successful legitimate business enterprise. The existence of effective compliance risk control systems is an implicit assumption of investors and other enterprise stakeholders. Unfortunately, existing control systems in the typical business often fail to meet investor and stakeholder expectations. All too often, the fragmented nature of compliance control systems results in negative ―surprises‖. Numerous compliance failures over the past decade help make the case for an integrated, effective enterprise-wide risk management system. Investor losses and large corporate settlements help highlight the costly nature of compliance failure, supporting the case for change.
The focus of Sarbanes-Oxley control reporting has been limited to financial reporting controls; it is now time to expand control design, integration, evaluation and governance reporting to other risks as well. Directors and executive managers should compare the current control system to a model, such as the COSO enterprise risk management framework. The resulting gap analysis will highlight potential weaknesses and areas to be addressed. Many organizations can leverage the lessons learned from the costly Sarbanes-Oxley Section 404 implementation process to effectively integrate compliance risk management, controls, evaluation and communication into existing business processes. Successfully recognizing and addressing compliance risk should result in a positive return on project investment through risk reduction, lower cost of capital, and favorable treatment under Federal sentencing guidelines.
INTRODUCTION At the large public company level, transparency now exists for the first and third objectives: Sarbanes- Corporate responsibility and governance have Oxley requires auditing and reporting on financial undergone a serious transformation as a result of the controls. Operating effectiveness can be derived from provisions of the Sarbanes-Oxley Act of 2002 the information contained in the financial reports and (referred to herein as Sarbanes-Oxley). The management disclosures. The one control objective responsibilities of management and the board of lacking transparency for many corporations is that of directors for financial reporting and controls are legal compliance. clearly defined in the law. In contrast Sarbanes-Oxley does not address corporate legal regulatory Compliance weaknesses or control failures can lead compliance (outside of financial reporting to contingent or real liabilities when legal violations compliance) to any great degree. are alleged. Yet without any disclosures as to how a particular enterprise addresses compliance risk, The new law has a distinct focus on financial stakeholders lack vital information about business reporting and related internal controls. This was in conduct. Without appropriate information, financial no small part in reaction to the abuses and financial markets cannot efficiently price the compliance risks frauds committed by management in the most for a given enterprise. Such mis-pricing results in egregious cases. However, the COSO framework for poor allocation of capital and when illegal acts are internal control identifies three control objectives: disclosed, huge, potentially disruptive price adjustments. Reliable financial reporting, Compliance with applicable law and There is no relevant reporting methodology to regulations, and support outsider assessment of legal compliance. For Operating effectiveness (COSO, 1992)
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years investors, boards and management of many These incentives should prove sufficient motivation public enterprises have implicitly assumed that legal for adopting a robust risk compliance program, compliance was effectively managed and controlled without legal mandates similar to Sarbanes-Oxley. within the organization. This assumption has resulted Private sector initiatives should be encouraged and in the discounting of this risk into relative obscurity. monitored; voluntary adoption should provide for a Yet, compliance risk (violations of laws and more positive experience than the control evaluation regulations) represents a significant, albeit rare threat, reporting and reporting mandated by Sarbanes-Oxley to shareholder value. Section 404.
Without assurance that an active comprehensive THE CASE FOR COMPREHENSIVE compliance control system is in place, stakeholders COMPLIANCE CONTROLS have no basis for evaluating the impact of Enterprise Risk compliance risk events on the enterprise. Moreover, without a comprehensive risk plan, the board of Enterprise risk is categorized by COSO into the directors does not have a basis for providing following categories: shareholders reasonable assurance that compliance risk is appropriately managed. When material Strategic, compliance failures are alleged and made public, Financial reporting, markets are swift to react. Existing research supports Operational and the proposition that markets punish illegal behavior Compliance (COSO, 2004) (Rao, Hamilton 1996) and (Davidson, Worrell, Lee, Their proposed risk management framework was 1994). Conversely, companies with long-standing published subsequent to the original control pervasive ethics programs seem to be rewarded with framework and Sarbanes-Oxley. Logically, risk exceptional financial growth. management guidance would precede controls, This paper proposes that compliance risk be however, the original charge of the committee was to addressed explicitly and in a comprehensive manner develop a controls framework in response to by the enterprise. Numerous examples of legal perceived control failures in the late 1980‘s and early violations by high profile organizations help make 1990‘s. The COSO risk categories do not naturally the case for active risk management and robust ethics align with typical organizational structure, but rather programs. Existing research supports this were adopted for sake of analysis and discussion. recommendation. The compliance risk plan needs to Overlap of risks and controls among functional encompass risk identification and assessment, risk business areas can occur. However, the COSO response, ethics program implementation, construct is useful in discussing the compliance compliance controls, monitoring, assessment and challenges facing modern enterprise. regular reporting. From a shareholder perspective, strategic and The benefits of adopting such a program are: operational effectiveness are tied to management planning and execution, and would normally be Enhanced shareholder value (through evaluated based upon financial results and other reduced risk) disclosures made by management. Before Sarbanes- Improved governance Oxley, financial reporting and compliance risks were Better management accountability not easily evaluated by investors. Traditionally these Positive public opinion risks have been entrusted to management controls Leniency under Federal sentencing and the implicit assumption was that such risks were guidelines, should violations be uncovered remote and mitigated by factors such as the external audit report on the financial statements.
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The primary qualitative characteristics of financial of information, product safety, pensions and benefits, reporting are relevance and reliability. Sadly, in light taxes and financial reporting, with numerous other of the Enron, Worldcom and other scandals, investor areas as well. Thus it is impossible to address legal reliance on auditors‘ opinions was misplaced. As compliance without reviewing all business areas, repeated reports of new alleged reporting scandals business processes and employees responsibilities. unfolded, reliability was discounted by the market so highly, that an overall investor flight from equities Many laws and regulations are industry-specific; thus occurred. Beyond auditor responsibility, management companies in the public utilities, pharmaceutical, disclosures provided little assurance as to the control insurance, banking , transportation, health care and environment. Corporate chief executives defended similar businesses have detailed, often complex rules their actions by claiming ignorance as to the to follow. Compliance with such industry based laws effectiveness of organizational controls. Sarbanes- and regulations is essential to maintaining a Oxley was the legislative reaction to audit failure and successful ongoing franchise, yet as we will see, even management irresponsibility for controls. The law such industry rules are violated on occasion. also addressed other abuses identified in the course of Subject matter experts in the various laws and investigations and hearings. regulations must be part of the team analyzing risk Yet Congress only primarily focused legal compliance risk. They must work with business units, requirements on reporting risk, leaving compliance in order to understand the particular organizations risk in virtual status quo. Numerous high-profile risk profile. Because of this linkage with basic cases of alleged legal and regulatory violations business processes, most compliance controls are highlight the need for adopting of a stricter, actively embedded in everyday policies and procedures. In managed program for corporate ethics and many cases, the linkage of a control activity to legal compliance risk management. Regular reporting and compliance may be less than apparent. The active communication with the board are key employee performing the required activity may not elements of such a program. even recognize it as a regulatory requirement. In such cases, ongoing training and awareness assessment Compliance risk discussions and disclosures are not can help support effective compliance. commonly found in corporate annual reports, typically these are usually disclosed once a major Since not all compliance risks have potentially compliance violation has been alleged by regulators material impact on the enterprise, management must or government representatives. Rather than learning perform a risk assessment to evaluate both the about compliance failures and the company‘s probability and potential impact of compliance program to address failures, a more proactive failures. The typical organization may have approach is encouraged. Voluntary disclosures about thousands (or more) of compliance risks. The risk preventative measures in the company‘s control assessment allows for a ranking and identification of system and the results of monitoring would provide those possible events which would have material the information which is now sorely lacking. impact on the enterprise and its value. By combining likelihood and monetary impact, the material risks COMPLIANCE CONTROL CHALLENGES can be ranked and given appropriate attention. High risk impact events need to identified and reviewed Legal compliance is not a separate process or periodically. Control activities addressing such risks function. It pervades just about everything the require elevated monitoring and communication. enterprise does in the course of business. Under the current legal regimes of most developed countries, Assessment of control effectiveness is as important as significant regulation covers labor and wage the control itself. Audits of key controls and their practices, contracting, bidding and sales, restraint of effectiveness help complete this cycle. A risk-based trade, environmental impacts, illegal bribes , privacy audit of compliance controls and assessment of
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controls weaknesses and failures must be conducted the direct costs (fines / settlements) are often regularly and thoroughly. The evaluation of control material. This is without even considering the losses effectiveness through regular auditing is essential. suffered by debt and equity investors as a Reports of controls assessment and monitoring need consequence of such news. to be shared with communicated effectively. ―Risk Focused audit programs should be reviewed regularly In particular, disclosures of violations which threaten to ensure that audit resources are focused on the the revenue stream and profitability can result in higher-risk areas as the company grows and produces huge stock price corrections. Because the and as processes change….Audit committees should shareholders have not appropriately discounted the receive reports on all breaks in internal control.‖ enterprise risk, the market reactions to such (Bies, 2004) announcements are immediate, steep drops in the share price. Share price volatility and increased Noncompliance may be attributed to lack of trading volume are typical in such circumstances. knowledge and proper training. On the other hand, Shareholders‘ losses reflect both the direct costs of individual behaviors and corporate incentives to take regulatory and legal settlements as well as the loss of undue risk can result in illegal acts. Since violating future business cash flows. the law potentially gives a business an unfair competitive advantage, unscrupulous individuals or The recent experience of implementing Sarbanes- groups might conspire to achieve personal gain. Oxley requirements, most notably Section 404, Because incentive compensation can reward such shows that most organizations did not have well- wayward efforts, ethics training is a key component documented, comprehensive systems which were of an effective program. Likewise, business practices continuously monitored. The fragmented nature of and compliance controls must be pervasive and financial controls and the resulting efforts and actively monitored. Research has demonstrated that resources required to align the management control compliance programs alone are less effective than systems have received impressive publicity. There is combined programs addressing ethics and no reason to believe that the present state of most compliance (Verschoor, 1998). The ethics portion of compliance control programs is different or better. the program establishes the corporate norm, the ―tone Organizations which have not experienced recent at the top‖ for all employees. The compliance violations of the law, many have such controls on program targets specific risks with controls and ―autopilot‖. monitoring activities. Verschoor‘s study links strong If management does not perform a vigorous risk management controls that emphasize ethical and management exercise, the board and shareholders socially responsible behavior and favorable financial have inadequate information for risk assessment. performance. Finally, US Public companies are now The dangers inherent in control systems without required to adopt and disclose corporate codes of active management are all too apparent. Current news ethics. Sarbanes-Oxley defines a code of ethics to headlines reflecting product recalls because include promotion of ―honest and ethical conduct‖ outsourced manufacturers used lead paint in toys or and requires disclosure of the codes applicable to tainted food products reflect such lax controls. senior financial officers. Likewise, scores of public companies have admitted RECENT FAILURES back-dating stock option grants, or are under investigation for such practices. While these If reports of alleged illegal acts were rare or the allegations will be resolved over time, we can consequences insignificant, one could argue that the examine failures in the recent past where closure has benefits of a comprehensive compliance program do been reached. Table 1 lists five well-publicized not justify the program costs. Unfortunately, compliance failures occurring after the enactment of disclosures of such occurrences are both frequent and Sarbanes-Oxley and their direct consequences.
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Table 1 Recent Major Compliance Failures: Foreign Corrupt Practices Act (FCPA) violations are receiving increased publicity. One consequence of Corporation / group Alleged illegality Direct consequences such heightened scrutiny is that alleged transgressors are being required to put compliance officers into Marsh and McLennan Bid-rigging, anti- $850 million place, as part of the settlement agreement. ―The competitive practices restitution fund impact of SOX (Sarbanes-Oxley) has rippled outward Titan Corp Bribes, payments in $12 profits from the statute‘s core accounting as provisions to violation of Foreign disgorged and $13 Corrupt Practices Act million fine affect many areas of corporate business practices. The SEC and the DOJ have increased investigatory Wyeth-Ayerst labs Failure to meet FDA $30 million in fines staffs and are coordinating their efforts more closely, production quality regulations and companies are subjecting their records to greater scrutiny. Therefore, increasing FCPA enforcement ABB Ltd Bribes, payments in $5.9 million civil is, to some degree, a byproduct of accounting reforms violation of Foreign penalty, $10.5 Corrupt Practices Act million criminal unrelated to FCPA‖ (Burr, 2005) . penalty In the most notable recent FCPA case, Titan Corp, a Music industry (Universal Anti competitive $67 million Music, Sony Music, practices settlement and government contractor, set records for settling Warner Music, et al.) distribution of $76 charges of numerous violations of the FCPA. The million in CDs to public and non- $25 million combined settlement caused management profit groups upheavals, and resulted in unraveling of a proposed merger with Lockheed-Martin. Titan Corp is an
example where the control environment or ―tone at Material compliance failures in public corporations the top‖ lacked respect for legal compliance, alleged are indicative of failed or inadequate control violations pervaded many businesses and locations. activities. Likewise, the tone at the top – the ethical control environment may also be lacking in such Other allegations of illegal acts have included many cases. recognizable public corporations: Schering-Plough, Monsanto, DaimlerChrysler and Syncor, just to name Marsh and McLennan (Marsh) is a noteworthy a few. Clearly, significant compliance violations are example. Marsh is an insurance broker which is all too frequent and create unacceptable risk for alleged to have engaged in illegal bid-rigging corporate investors and other stakeholders. business practices. The incidents were not isolated but rather formed a key component of Marsh‘s It should be noted that an enterprise with an effective business model for insurance brokerage. The NY compliance program can mitigate legal consequences Attorney General filed suit alleging violations of (Hess, 2007). Federal sentencing guidelines provide general business law, monopoly, restraint of trade, exceptions and leniency in cases where such and anti-competitive violations of insurance law. On programs are proven to exist. January 30, 2005 Marsh settled with the state, establishing a policyholder fund of $850 million. COMPREHENSIVE COMPLIANCE RISK Following the announcement of the state‘s lawsuit, MANAGEMENT Marsh‘s stock price dropped from approximately $45 Unless management has adopted a comprehensive a share to $22.75 per share. (Marsh, 2005) This compliance risk management plan, shareholders resulted in a loss of over $11 billion in market cannot reasonably assess enterprise risk. With capitalization in just one day. Shareholders were not perfect information available, in a case where the only investors adversely impacted. Debt securities management adopts an risky stance towards legal also dropped in value and the company, an industry compliance, investors would demand a stock price leader, faced serious liquidity and financing risk premium, which in turn, would cause the challenges. (Marsh, 2005).
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enterprise cost of capital to rise. Such an enterprise Vigorous testing of legal compliance would be at a competitive disadvantage relative to through all business areas, through competitors with less aggressive risk profiles. An monitoring and internal audits. Results of enterprise adopting active risk management controls audits must be reported to the Board of should disclose its programs and its evaluation as to Directors on a regular basis. the program effectiveness. Such disclosures should Clear and regular communication as to the be particularly effective where industry-specific consequences for employees found compliance is critical to ongoing profitability. responsible for illegal acts. Communication to shareholders about ethics Recognizing the importance of a comprehensive plan and compliance programs, including updates for risk management, COSO has published guidance on the assessment and monitoring processes. for implementing enterprise risk management. In particular, the COSO risk framework relies upon the Correspondingly, members of the Board and quantification of risks inherently associated with the shareholders should demand that management business. Specific techniques may vary from implement such a program and report regularly on its business to business within an enterprise. Once progress. If the markets do indeed reward ethical assessment has taken place, the appropriate responses behavior and transparency, then such voluntary are: avoidance, reduction, sharing and acceptance. efforts should lead to widespread adoption of Such responses should be developed from an entity- comprehensive compliance programs. Competition wide, portfolio perspective (COSO, 2004). for capital and the desire to maximize shareholder return will accomplish adoption, through market Ethics programs tied to the control environment or forces. ―tone at the top‖ should be adopted along with, or ahead of a compliance program. Thus the SUMMARY combination of the pervasive ethics component, Research in the existing literature supports the notion along with target control activities, should address that markets react negatively to disclosures of alleged specific risks while providing the appropriate control illegal behavior. While the direct costs associated environment or organizational tone. with settlements and fines are by themselves RECOMMENDATIONS significant, when the indirect costs of investor losses are counted, the impact can be staggering. Most Because of the consequences to stakeholders and investors and other stakeholders have no information potential benefits of socially responsible programs, about the enterprise‘s compliance risks. While the enterprise should undertake: Sarbanes-Oxley has achieved transparency with Implementation of a corporate ethics regard to financial reporting, no parallel requirements program which includes training, support exist for legal compliance. Implementing a and assessment on a continuous basis. Such comprehensive ethics and compliance risk a program has to set high standards for management program is complex, since every facet ethical behavior throughout the entire of the business is potentially impacted. By using a organization. risk-adjusted approach, management can and must identify, rank and establish robust controls and A compliance risk assessment which monitoring of high risk activities. The program must estimates both the probability of risks and include an overarching ethics component and be the potential consequences, direct and regularly monitored through audits and assessments. indirect. Voluntary disclosure of such compliance programs to Evaluation and realignment of existing stakeholders is encouraged. There are a number of controls in light of the risk assessment benefits to the enterprise when a successful activities.
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compliance program is in place, most notably Rao, Spuma M; Hamilton, J Brooke III; The Effect of reduced cost of capital and improved governance. Published Reports of Unethical Conduct on Stock Prices; Journal of Business Ethics; December 1996. REFERENCES Bies, Susan Schmidt; Vital Speeches of the Day, Marsh MacLennan Corporation; 2004 Annual Report New York: May 1, 2004 Vol 70, Iss. 14. to Shareholders; SEC Form 10-K, March 2005.
Burr, Michael T.; Corporations Caught in Rising Sarbanes-Oxley Act of 2002; 15 USC Sec 7264 (a) Tide of FCPA Enforcement; Inside Counsel, Schwartz, Mark S.; Effective Corporate Codes of November 2005. Ethics: Perceptions of Code Users, 55 J. Bus Ethics, COSO, Internal Control – Integrated Framework, 323, 325 (2004). (New York: AICPA) (1992). US Securities and Exchange Commission; Securities COSO, Enterprise Risk Management – Integrated and Exchange Commission v. the Titan Corporation; Framework (New York: AICPA) (2004). Litigation Release No. 19107; March 2005.
Davidson, Wallace N III; Worrell, Dan L; Lee, Chun Verschoor, Curtis C; A Study of The Link Between a I; Stock Market Reactions to Announced Corporate Corporation’s Financial Performance and its Illegalities; Journal of Business Ethics; December Commitment to Ethics; Journal of Business Ethics; 1994. October 1998.
Hess, David; A Business Ethics Perspective on Sarbanes-Oxley and the Organizational Sentencing
Guidelines; Michigan Law Review. Ann Arbor: Jun 2007. Vol. 105, Iss. 8.
John A. Kruglinski is an assistant professor of accounting at Kutztown University of Pennsylvania. He is a Certified Public Accountant and holds an M.B.A. from New York University. His interests are in tax, accounting systems and internal controls.
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TOWARD AN UNDERSTANDING OF AUDIT FIRM ROTATION AS PUBLIC POLICY: THEORIES OF DEVIANT BEHAVIOR Mark L. Usry, Bloomsburg University of Pennsylvania Wilmer Leinbach, Bloomsburg University of Pennsylvania A. Blair Staley, Bloomsburg University of Pennsylvania Mike Shapeero, Bloomsburg University of Pennsylvania
ABSTRACT
In the aftermath of the recent financial reporting scandals, policy makers have suggested that audit firm rotation may be one way to reduce fraudulent financial reporting. The Sarbanes-Oxley Act of 2002, requires that partners and managers, but not audit firms, be periodically rotated off the audits of publicly traded companies. This paper considers several prominent criminology theories, including differential reinforcement and strain theory, as rationales for legislation requiring rotation of audit firms.
INTRODUCTION for example, GAO, 2003). Unfortunately, the Enron, WorldCom, Tyco International, Global arguments both for and against mandatory rotation of Crossing, Quest Communications, Adelphia audit firms lacks historical and theoretical substance. Communications, ImClone, Xerox, HealthSouth, and For example, a traditional argument for mandatory Royal Ahold. These recent audit failures highlight rotation of audit firms is simply that it provides for a the significance of accounting fraud (Hwang & ―fresh look‖ at an organization‘s internal controls and Staley, 2005). It is estimated that fraud affects about financial reporting, without any support for whether 75% of U.S. companies, and costs approximately this is or might be true (see, for example, GAO, $652 billion (KPMG Forensic United States, 2003; 2003). ACFE, 2006). Unfortunately, most occupational This paper adds to the audit literature by providing a fraud schemes involve either the accounting rationale for audit rotation that is based on grounded department or upper management (ACFE, 2006, p. theory, specifically criminology‘s Differential 5). Reinforcement Theory. Specifically, this paper Public policy makers frequently propose requiring provides a detailed history of mandatory audit firm the mandatory rotation of audit firms as at least a rotation proposals. It then considers other reasons partial solution to the pervasive problem of fraud in why companies change auditors and several organizations (see, for example, GAO, 2003; Raiborn prominent criminology theories, including et al., 2006). Indeed, in 2007, the Internal Revenue differential reinforcement and strain theory, as Service proposed rotation of audit firms for non- rationales for legislation requiring auditor rotation. profits (IRS, 2007). Advocates of mandatory rotation The paper concludes with a discussion of mandatory of audit firms achieved a small measure of success audit firm rotation based on the historical and with the passage of the Sarbanes-Oxley Act, which comparative analysis and based on grounded theories requires rotation of audit partners, though not audit of criminology. firms (15 U.S.C. 78j-1(j)). MANDATORY AUDIT FIRM ROTATION Just as public policy makers traditionally propose Mandatory Audit Firm Rotation – US mandatory rotation of audit firms, audit firms and the American Institute of Certified Public Accountants The aftermath of the McKesson Robbins Case of the just as traditionally oppose such a requirement (see, 1930s, where audited financial statements of a non-
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existent drug company showed assets of $19 million Commerce, Corporate Rights and Responsibilities for and profits of $1.8 million, produced an atmosphere mandatory audit firm rotation as a means to insure where change in accounting procedures appeared auditor independence (Hearing, 1976). After fairly necessary. Not only did the AICPA establish the strong recommendations by committee staff, the Committee on Auditing Procedure (later morphing Committee adopted a compromise position of self- into the Auditing Standards Board) but in hearings, policing of the profession by the profession in before the Securities and Exchange Commission cooperation with the SEC. (SEC) in 1939, the subject of mandatory audit firm rotation was first mentioned (Hoyle, 1978). In 1978 the AICPA Commission on Auditor‘s Responsibility (Cohen Commission) recommended Although not seriously considered at that time, the changes in the accounting profession and considered issue of mandatory audit firm rotation continued to mandatory audit firm rotation because ―the tenure of resonate with some. In 1958 another author, N. the independent auditor would be limited‖ and Loyall McLaren, listed the potential benefits of audit therefore ―the incentive for resisting pressure from firm rotation and those that pertain to the issue management would be increased‖ and because addressed in this paper include: mandatory audit firm rotation would ―bring a fresh viewpoint‖ (p. 108) However, the Commission cited A fresh, viewpoint is desirable at more or the following as reasons to not require firm rotation: less frequent intervals. increased cost of changing audit firms; the finding New blood ensures greater alertness. that continuous relationships between audit firms and Long-established familiarity between the clients was beneficial; and, in a study of cases but auditor‘s representatives and the client‘s determined that where there was substandard auditor employees may lead to collusion. performance, it appeared to occur much more often in Mistakes of previous auditors may be the first or second year of an audit rather than in the detected and corrected. later years of audits. The Commission did recommend audit personnel rotation due to ―over McLaren then proceeded to argue why each did not familiarity‖ or a close relationship between client and make sense. His primary arguments however relied audit firm (Commission on Auditor‘s Responsibility, on the integrity of those hired into the accounting 1978, p. 109). profession and those audit standards that made collusion between the firm and its auditors almost In 1987, the National Commission on Fraudulent impossible (McLaren, 1958). Financial Reporting (Treadway Commission) recommended that special attention be paid to first- In 1967, an editorial in the Journal of Accountancy year audits of clients, because there appeared to be a decried the idea of mandatory audit firm rotation. A significant correlation between fraud-related cases past president of the AICPA, J. S. Seidman argued in and those companies that has recently changed his response that in ―an age of consumerism‖ the auditors (Treadway Commission, 1987). accounting professions first duty is to the shareholder, not management (1967, p. 30). Seidman In 1995, Congressman John Dingell asked the went on to say that ―company satisfaction with the General Accounting Office to evaluate auditor may be the occasion for public recommendations made for improvements of audits dissatisfaction‖ (1967, p. 30). It is this attitude that is of public companies. The GAO considered the given some credit for the calls for mandatory audit findings of 37 separate study groups and concluded firm rotation (Hoyle, 1978). that while most issues had been addressed, there were five major unresolved issues including ―auditor In 1976, consumer activist Ralph Nader and independence‖ (Carmichael, 1997, p. 18). Although members of the Corporate Accountability Research the GAO considered mandatory auditor firm rotation, Group argued before the Senate Committee on
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it was rejected because ―the continuing auditor recommended that mandatory audit firm rotation not relationships outweighed the risk‖ (Carmichael, be required at that time. The report cited the many 1997, p. 22). changes required by SOX and the need to implement those changes before taking additional steps, and the However, attitudes changed following the scandals at results of a survey that indicated the cost of such a Enron, WorldCom and others. In response to these requirement could outweigh the benefit. audit failures, Congress passed the Corporate and Auditing Accountability, Responsibility, And As companies and audit firms have absorbed the Transparency Act of 2002 (Sarbanes-Oxley Act). changes required by SOX, the issue of mandatory After passage of SOX, the U.S. House of audit firm rotation has re-surfaced. A list of reasons Representatives sponsored hearings to discuss past supporting mandatory audit firm rotation was attempts to reform the accounting profession. In his published in the Journal of Corporate Accounting & opening statement, Representative Dick Gephardt Finance (Raiborn, 2006). Reasons pertinent to this stressed the need for accountability and responsibility paper include: to serve as the basic operating principles for the capital markets. While it required a number of Decreases the development of friendships changes, SOX did not mandate rotation of audit and ―coziness‖ between audit firm and client firms. According to Congressman LaFalce, the employees benefits of such a change would include: Decreases the potential for auditor to succumb to management pressure to use A new audit firm would bring to bear skepticism and questionable accounting techniques or fresh perspective that a long-term auditor may lack; accept compromised accounting procedures Increases public perception of auditor Second, auditors tend to rely excessively on prior independence years‘ working papers, including prior tests of Increases the potential for audit firms to be client‘s internal control structure, particularly if fees more vocal about disagreeing with are concerned; questionable client practices. Long-time auditors may come to believe that they Increases audit quality by providing a ―fresh understand the totality of the client‘s issue, and may look‖ at client reporting practices. look for those issues in the next audit rather than Increases audit quality because the current staying open to the other possibilities; and audit firm would be aware that a successor auditor would be more likely to detect and An auditor may place less emphasis on retaining a disclose predecessor auditor errors or client relationship even at the cost of a compromised inefficiencies. audit if it knows the engagement will end after several years. Evidence that this position is gaining support may be found in the current draft Good Government In 2003, the GAO produced a study The Required Practices for 501(c) (3) Organizations in which the Study on the Potential Effects of Mandatory Audit US Internal Revenue Service recommends that: ―The Firm Rotation for the Senate Committee on Banking, auditing firm should be changed periodically (e.g., Housing and Urban Affairs and the House Committee every five years) to ensure a fresh look at the on Financial Services. The study included testimony financial statements‖ (no page). that the mandatory rotation of audit firms was necessary to maintain the independence and Mandatory Audit Firm Rotation – US states objectivity of financial statement audits, as well as At this point while not an exhaustive analysis, there statements that rotation could be disruptive and not appears that no state has adopted mandatory audit cost-effective. In its summary, the report firm rotation. An analysis of the five states hardest
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hit by the recent corporate scandals (Arizona, The International Monetary Fund (IMF) is one California (considered in 2005), Connecticut, New international organization that has weighed in on the York and Texas) found no support for mandatory issue. The IMF as of a 2004 decision now requires audit firm rotation (Gantt, 2007) rotation of its external audit firm every 10 years (International Monetary Fund, 2004). Mandatory Audit Firm Rotation – International OTHER REASONS FOR According to a report published by the Bocconi AUDITOR CHANGES School of Management, following a number of A review of the existing literature identifies a mixture perceived public accounting failures and corporate of behavioral and economic reasons for auditor scandals, only five countries, out of 24 countries change. Beattie and Fearnley (1998a, b) suggest that studied, require the mandatory rotation of audit firms purely economic factors, such as industry (SDA Bocconi, 2005). specialization, top management/auditor relationship These include: Brazil (banks and listed companies– and banker/auditor relationship, are the primary every five years) India (banks, privatized insurance reasons for audit firm changes companies and government companies– every four Attempting to reduce the cost of the audit is also years), Italy (listed companies–every nine years), frequently cited as a reason for changing auditors Singapore (Singapore chartered banks only– every (Beattie & Fearnley, 1995; Bedingfield & Loeb, five years) and South Korea (companies listed on the 1974; Woo & Koh, 2001 Korean Stock Exchange or registered with Korea Securities Dealers Automated Quotations– every six Another issue cited by companies for changing years.) auditors is their concern about the quality of the audit work. Menon and Williams (1991) contend that Among those countries that have tried mandatory quality serves as an important differentiating audit audit firm rotation and have eliminated it are: attribute and is heavily reliant on the perceived Canada (required for banks until 1991), Spain credibility that certain auditors bring to their (eliminated in 1995), Slovakia, Latvia, Turkey and engagements. Audit quality also includes such the Czech Republic (Institute, 2002). factors as size of audit firm, its name brand, Ireland and Australia both considered mandatory independence and industry of expertise. Auditor audit firm rotation in 2001, but rejected it (Institute, changes occur more frequently among companies 2002). employing non-Big 4 firms. Larger audit firms are perceived to be able to render a certain level of Countries currently considering the requirement service and therefore synonymous with a higher include Austria (now waiting to see what the quality level. European Union as a whole will decide) and South Africa (Business Day, 2003). Another, highly sensitive, reason for changing audit firms relates to the level of audit opinion issued by The European Union 8th Directive went into effect in the current audit firm. While some studies indicate May 2006. The directive, similar to many aspects of that auditor changes are not affected by the audit SOX does not require member states to implement opinion issued (Knapp & Elikai, 1988), Lennox mandatory audit firm rotations, but it does found that those companies who received a qualified specifically allow those who choose to do it to make opinions were more likely to switch auditors thereby that choice (Journal, 2006). increasing the probability of getting a better opinion (Lennox, 2000, 2003). Vinten (2003) suggests that in the post-Enron era ―companies do successfully
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engage in opinion shopping, swapping auditors to Citing the inclusive studies of strain theory, Ganon suit their narrow self-interest and Donegan (2006) argue that strain theory in general and strain theory as operationalized by the CERTAIN THEORIES OF fraud triangle may not explain why individuals may CRIMINAL BEHAVIOR commit fraud in organizations. Coleman (2002, p. While the theoretical arguments for, and against, the 195) explains that ―there appears to be no necessary rotation of audit firms appear to be in the reason why an embezzlement must result from a non- developmental stages, theories of criminal behavior shareable problem instead of a simple desire for more are robust and well grounded. Responding to money.‖ Thus, while intuitively appealing, the fraud ―stinging criticism‖ in the 1930s that criminology triangle as a model for understanding and explaining was not scientific enough, criminologists have sought (and thus presumably preventing) fraud in to develop a scientific understanding of criminal organizations has been adopted by the accounting behavior based on observed behavior, biological profession ―without a serious consideration of other origins, and behavioral models (such as operant perspectives‖ and they suggest that ―fraud accounting conditioning) (see, e.g., Hoffman, 2003; Matsueda, research would be enriched by expanding the 1988; Sutherland and Cressey, 1974; Sutherland, dialogue to include the fruits of current criminology 1939). Two theories of criminal behavior most theory and research‖ (Ganon and Donegan, p. 6). relevant to fraud in organizations are strain theories Further, strain theory would not seem to support the and differential association theories. mandatory rotation of audit firms as such rotation would not break any of the three elements of the Strain Theories of Crime fraud triangle.
At the most basic level, strain theories of crime hold Differential Association Theories of Crime ―that crime breeds in the gap, imbalance, or dysfunction between culturally induced aspirations Another, and we would argue, more relevant theory for economic success and structurally distributed of criminology is differential association. possibilities of achievement‖ (O‘Connor, 2007, no Sutherland‘s theory of differential association (1939, page). The strain theory was first applied specifically 1947) attributed the cause of criminal activity to the to fraud (embezzlement) by Cressey in his 1953 work social context of individuals, rather than to the Other People’s Money: A Study in the Social individuals themselves. It stated that criminal Psychology of Embezzlement (Ganon & Donegan, behavior is learned through interaction with other 2007). Cressey‘s application of strain theory to persons, predominantly within primary groups understanding and explaining fraud in organizations (family, peers, and friends). This learning process has been adopted by the Association for Certified included not only the specific techniques and skills Fraud Examiners (ACFE) and much later by the for committing crimes but more importantly, the American Institute of Certified Public Accountants (AICPA) (Ganon & Donegan, 2007; ACFE, 2005; AICPA, 2006). Cressey developed what accountant status of the subjects….‖ By opportunities, the ACFE recognize as the fraud the triangle (Ganon & (2005, p. 4.508-4.509) means that the subject must Donegan, 2007), namely, the ―three conditions have general knowledge that fraud may be generally present when material misstatements due to committed, and the specific skill to commit the fraud. fraud occur: incentives/pressures, opportunities, and By attitudes/rationalizations, the ACFE (2005, p. attitudes/rationalizations‖ (AICPA, 2006, at A.1).1 4.509-4.510) means the subject‘s ex anti justification and motivation to commit the crime, e.g., their crime is not really a crime or is justified or is just part of a continuing pattern of behavior in their organization. 1 By incentives/pressures, the ACFE (2005, p. 4.504) means ―non-sharable problems that threaten the
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motives, rationalizations, and attitudes as to whether The strength of criminal behavior is a direct rules should be followed or broken (Matsueda, 1988). result of the amount, frequency, and probability of its reinforcement. Burgess and Akers (1966) revised Sutherland‘s theory to include the impact of operant conditioning According to Akers (1985), differential and social learning theory on behavior. According to reinforcement is best applied to behavior within Akers (1985), crime is initially learned through direct groups from which individuals receive reinforcement. imitation or modeling of deviant peers. The The individual learns criminal behavior from others subsequent likelihood of criminal behavior is and then this behavior is reinforced. The level of determined by differential reinforcement i.e., the positive reinforcement will determine whether the rewards and punishments following the act. behavior continues. Reinforcement can be direct to the individual or indirect, where observing another‘s criminal behavior DISCUSSION being reinforced will reinforce the observer‘s own In the aftermath of a significant number of fraudulent criminal behavior (Matsueda, 1988). financial reporting cases and related audit failures, Congress and regulatory agencies enacted legislation Burgess and Akers (1966) summarized this process in and regulations to reduce the likelihood of a re- seven stages. These stages reorganize Sutherland‘s occurrence. Many of these included provisions to nine propositions of behavior and add the concept of require rotation of auditors. Most, like Sarbanes- reinforcement: Oxley, require only that individual auditors (typically partners and managers) be rotated off audit Criminal behavior is learned according to engagements every five-seven years. the principles of operant conditioning or imitation. While this approach can break up inappropriate Criminal behavior is learned both in relationships between individual auditors and nonsocial situations that are reinforcing or management, it does not address the influence of the discriminating and through social interaction public accounting firm‘s culture on inappropriate when the behavior of others is reinforcing or auditor behavior. In short, rotating only individual discriminating. auditors does not change the underlying culture and The principal learning of criminal behavior reinforcers of the audit firm. occurs in those groups that compromise the individual‘s major source of reinforcement. Starting in the 1970‘s, the large public accounting The learning of criminal behavior is a firms began to increase the emphasis on client function of the effective and available relations – employees who could generate and retain reinforcers and the existing reinforcement clients had a better chance of being admitted to contingencies. partnership. The need to make clients happy was The type of learning, including techniques, continually reinforced, even at the partner level. attitudes, and avoidance procedures, and Junior partners, such as David Duncan at Arthur their frequency of occurrence depends on Andersen, were acutely aware of the need to service 2 the effective and available reinforcers and large clients in order to retain their partnerships. As the rules and norms by which these long as this reward structure is reinforced within the reinforcers are applied. firm, it is questionable whether merely rotating Criminal behavior is a function of norms which are discriminative for criminal 2 behavior. A description of this change in culture at Arthur Andersen can be found in Squires, et. al. (2003).
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individual auditors while retaining the audit firm will the auditor rotation provision of Sarbanes-Oxley be effective. addresses this at the manager and partner levels, mandatory firm rotation means that even staff Mandating auditor rotation by firm has the advantage auditors are replaced. It also may increase the public of lessening the influence of client retention as a perception of auditor independence as on its face at reinforcer. Audit clients coming and going will least there would not be a permanent potentially become a normal process for CPA firms. Firms will deviant subgroup in which management might be expect that partners will ―lose‖ clients. Further, the able to reinforce deviant behavior. The importance mandated shorter-term relationship will make each of perception is clearly noted in Rule 101 – auditors client less financially valuable to the firm. An are required to be independent in fact and appearance auditor who ―loses‖ a client will only cost his/her (a much higher standard). firm fees for the next several years, rather than losing an open-ended annuity. This, coupled with Sarbanes- CONCLUSION Oxley prohibition against providing consulting The recent accounting and auditing scandals have services to publicly traded audit clients, means the renewed interest in public policy requiring mandatory loss of each audit client is less of a financial problem. rotation of audit firms. In turn, this reduces client leverage and the potential for auditors to succumb to management pressures and An analysis of public policy experience with increases the potential for audit firms to disagree with mandatory audit firm rotation is inconclusive. Of the questionable client practices. ten countries that have mandated audit firm rotation, five no longer require it. The European Union allows Mandatory audit firm rotation may also shape client its members to mandate firm rotation, but does not behavior. Currently, if a client is unhappy with their require it. The Sarbanes-Oxley Act mandates rotation audit firm, they change firms rather than continue to of audit partners and managers, but not the firms. On put up with the problem for the foreseeable future. the other hand, the IRS recently issued a guidance However, if firm rotation is mandatory, the client is draft recommending the rotation of audit firms for looking at a relatively short time before having to non-profit organizations. change audit firms. Given this, clients may be more likely to stay in to reduce auditor changes and An analysis of the literature on voluntary auditor transaction costs. This also serves to reduce client rotation is also inconclusive. While ―opinion leverage and it may reduce the probability of creating shopping‖ has been identified as one reason a deviant subgroup in which fraud may occur. companies change audit firms; there are also a number of other, valid reasons identified such as lack Mandating audit firm changes may also increase of audit quality, audit fees, and client relationships. audit quality. The current audit firm knows they will be replaced within a short period and that the The traditional arguments for and against audit firm successor firm will be more likely to detect and rotation have been remained unchanged for almost 70 report predecessor errors. This could motivate CPA years and lack theoretical substance. Actual firms to emphasize audit quality, thereby making experience with mandatory and voluntary auditor quality a reinforcer. rotation is inconclusive. However, the theory of differential reinforcement suggests that rotation of There are other advantages of mandatory audit firm individual auditors may not be effective, and that rotation. It may reduce the opportunities for the mandatory rotation of audit firms may be necessary. development of friendships and coziness between auditors and client employees (Raiborn, et. al., 2006). When only individual auditors are rotated off audit Over time, auditors may become too comfortable engagements, the audit firm‘s culture and reinforcers with management and lose the ability to maintain an of potentially deviant behavior remain in place. Only appropriate level of professional skepticism. While the mandatory rotation of audit firms may lessen the
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amount, frequency, and probability of reinforcement Beattie, V. A. & Fearnley, S. (1998a). Auditor of antithetical behavior by a) reducing the pressure changes and tendering – UK interview evidence. of audit firms to retain clients no matter what it costs Accounting, Auditing and Accountability Journal, the firm in terms of audit quality, b) increasing the 11(1), 72 – 98. pressure to perform a quality audit (less the next audit firm find your mistakes), c) ensuring that client-firm Beattie, V. A. & Fearnley, S. (1998b). Audit market relations at all levels are temporary (which reduces competition: auditor changes and the impact of the time in which the client may teach the firm tendering, British Accounting Review, (30), 261 – antithetical behavior), and d) incentivizing clients to 89. stay with firms even if the clients are not happy with Blough, C. (1951). Auditing practice forum: Should the ―tough‖ auditors (as the relationship is temporary auditors be changed? Journal of Accountancy, April. and the present value of the benefits of changing auditors who will change in a few years or less may Burgess, R. and Akers, R. (1966). A differential not outweigh the transaction costs of changing association-feinforcement theory of criminal auditors). behavior. Social Problems, 14, 128-14
Future research may wish to employ the techniques, Carmichael, D. (1997). Report card on the tools, and methods of research criminology theory to accounting profession. The CPA Journal. empirically examine whether deviant subgroups of accountants and auditors were created by the process Corporate accountability hearing – Hon. Richard A. of differential reinforcement. Gephardt (Extensions of Remarks – July 19, 2002).
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GAO (2003). Public accounting firms: Required Internal Revenue Service. (2007). Good Governance study on the potential effects of mandatory audit firm Practices for 501(c) (3) Organizations. Retrieved rotation (GAO-04-216). Washington, D.C.: Author. October 17, 2007 from http://www.irs.gov/pub/irs- tege/good_governance_practices.pdf. GAO (2004). Mandatory Audit Firm Rotation Study: Study Questionnaires, Responses, and Jennings, M., Pany, K., Reckers, P. (2006). Strong Summary of Respondents’ Comments (GAO-04-217). corporate governance and audit firm rotation: Washington, D.C.: Author. Effects on judges‘ independence perceptions and litigation judgments, .Accounting Horizons, Gantt, K., Generas, G and Lamberton, B. (2007). September. Sarbanes-Oxley, accounting scandals and state accountancy boards. The CPA Journal, September Knapp, M. C. & Elikai, F. (1988). Auditor changes: 2007. a note on policy implications of recent analytical and empirical research. Journal of Accounting, Auditing Gephardt, R., Corporate Accountability Hearing, and Finance, 3, 78 – 86. Extensions of Remarks, July 29, 2002. Lennox, C. (2000). Do companies successfully Giacomino, D. (1994). Expanding the auditor‘s role engage in opinion shopping? Evidence from the UK. to narrow the expectations gap. Business Forum, Journal of Accounting and Economics, 29, 321 – Summer/Fall 1994. 337[online], available at http://accounting.rutgers.edu (accessed 2 October 2002). Hanson, W. (1977). Big brother and the Big Eight. Management Accounting, April 1977. Lennox, C. (2003). Opinion shopping and the role of audit committees when audit firms are dismissed: the Hoffman, J. (2003). A contextual analysis of US experience. Institute of Chartered Accountants of differential association, social control, and strain Scotland. theories of delinquency. Social Forces, 81 (March): 753-785. Mennon, K. & Williams, D. D. (1991). Auditor credibility and initial public offerings. The Hoyle, J., Mandatory Auditor Rotation: The Accounting Review, 66 (2), 313–32. Arguments And An Alternative, Journal of Accountancy, May 1978. Merton, R (1968). Social Theory and Social Structure. New York: Free Press. Institute of Chartered Accountants in England and Wales (2002, July). Mandatory rotation of audit McLaren, L. (1958). Arguments for rotation. The firms: Review of current requirements, research, and Journal of Accountancy, July. publications. Retrieved October 24, 2007 from http://www.icaew.com/index.cfm?route=133711 O‘Connor, T. (2007). Strain theories of crime. Retrieved October 17, 2007 from H.R. Rep. No. 107-414. Corporate and auditing http://faculty.ncwc.edu/TOConnor/301/301lect09.ht accountability, responsibility, and transparency act of m 2092, additional views of Mr. LaFalace. Raiborn, C., Schorg, C. and Massoud, M. (2006). International Monetary Fund, Decision No. 13323- Should auditor rotation be mandatory? The Journal (04/78), August 5, 2004. Retrieved November 15, of Corporate Accounting & Finance, May/June 2006. 2007 from http://www.imf.org/eternal/pubs/ft/sd/index.asp?decis Smith, D. B. (1986). Auditor ‘subject to‘opinions, ions=13323 disclaimers, and auditor changes. Auditing: A Journal of Practice and Theory, 95-108.
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Squires, S., Smith, C., McDougall, L., and Yeack, W. Whisenant, S.J. & Sankaraguruswamy, S. (2000b). (2003). Inside Arthur Andersen: Shifting Values, Evidence on whether disclosures by managers about Unexpected Consequences. 1st ed. Upper Saddle auditor-client frictions are related to changes within River, NJ: Pearson Education. and across quality levels [online], available at: http://papers2.ssrn.com/sol3/search (accessed 17 July Sutherland, E. (1939, 1947). Principles of 2002). criminology. Philadelphia, PA: Lippincott. Whisenant, S. J. & Sankaraguruswamy, S. (2000c). Sutherland, E. & Cressey, D. (1974.) Principles of Evidence on whether disclosures by managers about Criminology, 8th ed., Philadelphia, PA: Lippincott. auditor-client frictions are related to changes in either audit quality levels or size (for lateral-quality Temkin, S. (2003). Accountants oppose rotation level realignments) [online], available at: proposals. Business Today (South Africa), May. http://papers2.ssrn.com/paper.taf?ABSTRACTJD=24 Vinten, G. (2003). Opinion shopping and the role of 4228 (accessed 17 July 2002). audit committees when audit firms are dismissed: the Young, J. (1997). Defining auditors‘ responsibilities. US experience. In Lennox, C. (Ed), Institute of The Accounting Historians Journal, December. Chartered Accountants of Scotland, 78.
Whisenant, S. J. & Sankaraguruswamy, S. (2000a). Evidence on the auditor and client relationship: what can be learned from reasons reported by managers for changing auditors [online], available at: http://papers2.ssrn.com/sol3/search (17 July 2002)
Mark L. Usry, is an associate professor of business at Bloomsburg University of Pennsylvania Wilmer Leinbach, is an adjunct professor of business at Bloomsburg University of Pennsylvania A. Blair Staley, is an associate professor of business at Bloomsburg University of Pennsylvania Mike Shapeero, is a professor of business at Bloomsburg University of Pennsylvania
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DESIGNING A LAPTOP SURVEY AT A PENNSYLVANIA COLLEGE: A PRECURSOR TO INTRODUCING INNOVATIVE TECHNOLOGIES W. R. Eddins, York College of Pennsylvania
ABSTRACT
How should one introduce an innovative technology into the classroom? This paper presents research that explores the introduction of innovative technologies such as laptop computers into the instructional environment of a college. A survey based upon Rogers‘ theory of innovation diffusion is proposed as a framework to initiate the process and to promote faculty acceptance of change in the classroom.
INTRODUCTION great deal of research into the effectiveness of certain IIT such as long distance education How does one introduce an innovative (Russell 1999), research into digital forms of IIT instructional technology (IIT) such as laptop is not unanimous in its effectiveness. There is computers, handheld devices, a course research of positive effectiveness that indicates management system, or a collaborative learning that students who use IT have beneficial environment to an institution of higher education educational experiences leading to student- and enhance instructional effectiveness? An IIT centered learning and high faculty interaction is any technology that is novel, possibly (Laird & Kuh March 2005), that students‘ final transformative in nature, and is used by faculty exam grades increase when using a high quality, for instructional purposes. Other examples of feature rich, sophisticated IIT (Gold July 2004), IIT include a math emporium, a prototype of a that students in a distance education course out laptop classroom, a studio layout of a computer perform those taking a traditional course lab, student centered and hybrid learning spaces, (Shachar & Neumann October 2003), and that and clustered or theatre-in-the-round classrooms students using an online IIT made better first (Dittoe 2002). Regrettably, IIT often are semester grades than those in a traditional course implemented without an assessment of the (Lynch January 2002). On the other hand, other impact of the technology on instructional studies report that students using web-based effectiveness. materials had the same outcome as those using a traditional textbook (Press 2005), that students in This is an important question to institutions of a web-based statistical course received similar higher education. First, the cost of information grades as those in an online course (McLaren technology (IT) is a significant percentage of the Spring 2004), that students in a microeconomics institutional budget of higher education. IT is course did significantly worse in a virtual IIT the basic infrastructure that supports IIT, such as environment than those in a traditional or live networks, servers, and support staff. IT cost can course, and that students learn better through range from $1 million to $3 million for almost human interaction and that computer-based one third of institutions to over $17 million for feedback does not positively influence learning about 17 percent of institutions. In 2003 the (Mandernach January 2005). In summary, many median cost of IT was $3 million. See Table 1 researchers question the effectiveness of IIT in for a breakdown of the costs of IT by type of delivering positive student outcomes (Russell educational institution (Goldstein 2004). 1999). The second motivation for this question is the effectiveness of IIT. While there has been a
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The last motivation for the question bears on the showed Weaver and Nilson that laptops can nature of the studies reporting on the enhance student outcomes. For instance, 61% of effectiveness of IIT in higher education. students felt they were more engaged using According to Phipps and Merisotis (1999) many laptops, 86% of faculty agreed students were studies of effectiveness of IIT are flawed due to more engaged, 48% of students reported learning failure to control for extraneous variables, lack more, and 75% of faculty agreed that students of random selection of subjects, the questionable learned more. An important conclusion from validity and reliability of evaluation measures, this study is that faculty must be prepared for and failure to control for the emotional reaction innovative technologies via a development of both faculty and students to IIT. They state program, for instance, in order for IIT to be further that research designs emphasize successful. individual courses at the expense of the outcomes of an academic program. Combine the There are examples of outcomes-based research poor design of some of the studies with the in IIT that apply empirical techniques. Tan and importance of properly assessing outcomes for Morris (2005) developed a usage metric using a reporting to accreditation organizations and one survey of undergraduate students that showed recognizes that this is an area rich in research that they can achieve lifelong learning behaviors. opportunities (Characteristics of Excellence in The behaviors included ongoing formal learning Higher Education 2006). in business topics, time management, and managing family and careers; informal learning DISCUSSION in personal development; and professional learning in career related subjects. Finn and The discussion has four sections. The first Inman (Spring 2004) report a survey of alumni section presents an overview of research into the who had used laptops while in they were effectiveness of laptops in institutions of higher undergrads in college. They showed that the education. The second section discusses experience resulted in a positive change in research in the adoption of innovative IT and a attitude and that the digital divide based upon challenge to change the approach of that sex and professional discipline had diminished. research. The third section describes Rogers‘ Barak, Lipson, and Lerman (Spring 2006), (2003) theory of the diffusion of innovation. however, had mixed findings. Students had a The fourth section presents Rogers‘ model of the positive attitude about the use of wireless diffusion of technical innovations and makes a laptops, but had a less positive attitude about case that the elements of his definition can direct actively contributing to in-class activities. IIT research. Overall, they felt that the experience enhanced student centered and exploratory learning, and Research into Laptop Outcomes interactions with students and teachers, but Many institutions of higher education are conceded that laptops could be a source of adopting laptop computers at an astonishing rate. distraction. Finally, Sahin and Thompson (2006) Weaver and Nilson report that about 180 provide a methodology to obtain information universities were adopting laptops in 2005. about faculty members‘ needs of instructional Clemson University anticipated that faculty development prior to implementing IIT. would devise methods to use the laptops in the There are surprisingly good examples of classroom in an effective manner (Weaver & outcomes-based empirical research in laptop Nilson Spring 2005, p3). They report that effectiveness in k-12 education. Brooks, Miles, faculty members were skeptical of the mandate Torgerson and Torgerson (June 2006) examined to use laptops because of a negative perception the use of laptop software to deliver spelling of the utility of laptops. Even so, experience
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literacy training to 11-12 year old students. article, they reference Rogers (2003) the While they found no significant difference originator of the theory of diffusion of between laptops and traditional techniques and innovation, i.e. diffusion theory to argue that this that reading seemed to suffer from usage of the area of research should be expanded. For laptop software, the study is well-designed. example, Rogers proposes that an innovation has Grant, Ross, Wang, and Potter (2005) report on at least five attributes or theoretical constructs. ubiquitous computing using laptops in fifth grade In addition, Rogers also describes the adoption courses. Results showed that teachers had a process of an innovation. Benbasat and Barki‘s positive reaction to the technology and that critique of Davis‘ TAM theory concludes that teacher preparation facilitated student centered TAM too narrowly focuses a researcher of learning. innovative IT on perceived usefulness and ease of use. The next section discussed Rogers‘ Much of the literature on laptop outcomes in attributes of innovations in relation to laptops. higher education is constructive or exploratory in nature. For instance, Prescod (2003) shares the Rogers’ Attributes of an Innovation initial findings of a longitudinal study of undergrads using laptops while sharing no Rogers (2003) identifies five attributes of an empirical findings. Lansari and Al-Rawi (2007) innovation. A full consideration of these describe an outcomes based IT curriculum that attributes has the potential to broaden the field of used laptops. Tubaishat and Bhatti (2006) report IIT research. The attributes follow. on a laptop based learning environment that they Relative advantage – the extent to which the felt alleviated cultural, gender-based barriers to innovation is better than prior practice. education. They also felt that the IIT improved Compatibility – the extent to which the motivation, confidence, communication skills, innovation fits the culture of a social system. and encouraged collaboration. Complexity – the extent to which the innovation is seen as difficult to learn or use. Research in Innovative IT Trialability – the extent to which the innovation may be experimented with little Research in the adoption of innovative IT is or no negative consequences. often based upon the Technology Acceptance Observability – the extent to which the innovation is transparent to peers in a social Model (TAM) first proposed by Davis et al system. (1989). TAM describes how users come to accept a novel technology such as a software Weaver and Nilson (Spring 2005) give examples package, an operating system, or a computer where a laptop mandate when initially device such as a laptop. TAM states the implemented violated the principles of Rogers‘ conditions under which a user will adopt an attributes of an innovation. innovative IT. Thus, IT researchers who employ TAM to explore why users adopt an IT Relative advantage – faculty perceived laptops as not much different than desktops, innovation assume they need to elicit that laptops may be a passing fad, and that explanations about two theoretical constructs: laptops were an unnecessary expense to students. 1. Why the user believes the innovation is Compatibility – faculty perceived that the useful. laptop mandate was an administrative policy 2. Why the user believes the innovation is easy that did not arise from a clearly thought out to use. educational objective, and that the laptops were a distraction in class when students Benbasat and Barki (April 2007) have criticized surfed the internet or read email during research in innovative IT for over reliance on lectures, or used the internet to cheat during TAM because it is too narrowly focused. In their exams.
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Complexity – faculty may not have felt definition. Rogers focuses on four elements of prepared using laptops and that laptops diffusion: the innovation, the communication would require additional hours for course channel, time, and the social system. preparation. Trialability – faculty may have been fearful The attributes of an innovation provide research of technical glitches that cause work to be opportunities in improving the rate of adoption lost. Observability – faculty did not see sufficient of IIT. Administrators may ascribe to laptops a research by their peers that laptops enhance relative advantage for reducing the cost of learning. lectern style presentation systems often called ―smart classrooms.‖ The laptop can replace the Weaver and Nilson recount several initiatives standalone computer in the smart classroom that were enacted to support the thoughtful resulting in cost savings. According to Benbasat adoption of laptops such as pilot studies, and Barki (April 2007), IT artifacts such as cost identification of early adopters and professional savings are an important element in IIT research. development of faculty who were enthusiastic of Also, the instructor may attribute a personal laptops, personal incentives and recognition. As advantage to laptops in the classroom because a result, benefits were realized such as shifts in the instructor will know where the files are teaching style from traditional lectures to a located on the laptop, what programs are student centered approaches that fostered in-class available on the laptop, and how the laptop will interaction, participation, collaboration, and behave during lectures. Possibly more hands on exercises. Faculty members were importantly, as the innovation is applied in encouraged to share their experience and practice and research confirms positive coauthor papers, create presentations for outcomes, opportunities to work smarter will conferences, and collaborate to produce cross- become apparent. For instance, the first discipline assignments. Students and faculty approach to integrating laptops into the alike reported more engagement, improved classroom may be to use them as devices to faculty-student interaction, and more enhance lecturing, especially if all of the students convenience to students in finding information do not have laptops. However, Weaver and from the network and uploading or downloading Nilson (Spring 2005) propose that the most assignments to the network. beneficial impact of laptops occurs when the Finally, new forms of learning took place at instructor changes the style of learning from Clemson. They included novel data collection traditional lecturing to collaborative, student- techniques, student self-assessment via practice centered techniques. Rogers calls this process tests, student research opportunities via the re-invention. This process would be of interest internet, simulation exercises, and student to a researcher in IIT. collaboration. The next section continues the The second theoretical construct in Rogers‘ discussion of Rogers‘ diffusion theory of definition is the communication channel. An innovation to ask how one might introduce IIT. area of research here might be the circumstances Rogers’ Diffusion Model that cause an innovation to reach critical mass. Rogers‘ defines critical mass as the point where Rogers defines diffusion as ―the process in an innovation becomes self sustaining. He gives which an innovation is communicated through examples of innovations that matured slowly certain channels over time among the members because the channel was not available to enough of a social system‖ (Rogers, 2003, p. 5). There users to reach critical mass, such as the telephone are several implications for research into the and the fax. On the other hand, the cell phone adoption of an IIT such as laptops in this reached critical mass quickly because they could
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connect to the existing hardwired network. A interpretations and applications of concepts researcher interested in IIT and communication related to student-centered learning. channels might be interested in the impact of advanced data communications topics such as Finally, in light of diffusion theory one may wireless networks and protocols, IP enabled consider strategies to enhance the adoption of systems, or Internet 2. laptop and new teaching strategies. Hall and Elliot (2003) cite the 1998 National Survey of The third construct in Rogers‘s definition is time. Information Technology in Higher Education as Rogers classifies adopters of innovations based a motivation for their paper. They state that upon when they adopt an innovation into five many institutions face difficulty in supporting categories. The adopters from earliest to latest faculty who incorporate IIT such as the internet are innovators, early adopters, early majority, into their courses. Strategies which they report late majority, and laggards. See Figure 1. that speed the adoption of laptops and student- Obviously, a researcher in IIT would be centered learning follow. interested in the characteristics of faculty who would be laptop innovators and early adopters. Initially identify and appeal to opinion leaders and faculty with a technical The researcher also may want to know what background. software they would want to use, what special Ease the transition between early adopters to needs they would have of the IT department, and early majority adopters. what their perception of IT services are. A Convince late majority and laggards by peer particularly interesting question might be how pressure. this group can assist the institution in achieving Publicize and reward early laptop projects that achieve effective progress. critical mass and lift the majority of faculty to a Do not over-sell new IIT. student-centered approach to teaching. Another Demonstrate that new IIT are compatible question concerns the bumps along the way that with many teaching styles, including might impede the early majority from adopting traditional lectures. laptops. Provide training and course development using IT staff and peer faculty members. The final construct of Rogers‘s definition of Ease slowly into IIT by means of pilot diffusion is the social system of the adopters. studies, demonstrations, and phased implementation. Rogers discusses social learning theory and compares it to aspects of diffusion theory. Both theories stress the importance of information CONTEXT AND SURVEY DESIGN interchange between peers concerning innovation in order to achieve faculty learning. The college in this study is a medium sized Both theories examine the links between peers as liberal arts institution with a professional important conduits for behavioral change. These emphasis located in south central Pennsylvania. theories provide IIT researchers with One of management‘s strengths at the college is opportunities to explore the relationships consensus building and planning. This has between faculty members who experience resulted in long-range plans for the college, IT, laptops in the classroom with faculty who have library services, and other learning resources. In not had those experiences. Other questions that addition, the college has an Instructional might be explored are the nature of the Resources Committee (IRC) that is actively experience of faculty members in the same engaged in suggesting and evaluating plans, department and faculty members in other policies, and procedures to effectively apply disciplines. This could possibly result in novel learning resources in the academic curricula of the college. The college has an office of
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Institutional Research and Outcomes mobile nature of laptops and the advantages or Assessment. disadvantages that mobility might provide.
The IRC was given the task to develop Section 4 asks whether the participant feels there supporting materials for a pilot project to explore are limitations to access to computers, software, the effectiveness of laptop technology and the and support. This section is designed to explore potential impact of laptop technology on the level of access to instructional technology. institutional resources. Management will Section 5 asks what are the respondents‘ implement the pilot project in the fall semester of opinions regarding the impact computers have on 2007. This paper was written in support of that instruction. This section is designed to explore task. The pilot project will have several the advantages or disadvantage that laptops as components including a pre/post survey to innovations might bring to the classroom. explore the time dimension, a letter to faculty who will participate in the project, materials Section 6 asks the participants how they feel required by the Institutional Research Committee about the support received from the IT to do human research, and an analysis and department and colleagues. This section is written evaluation of the data collected. Given designed to explore the IT support provided by the research as reported above, the objectives of management and the social support provided by the survey were as follow. their peers.
Recognize and publicize laptop and teaching Section 7 asks the user to classify herself innovations in the classroom. according to Rogers‘ categories of adopters. Identify potential IT support issues related to This section will classify respondents and training and faculty development. possibly identify leaders who can serve as a Aid in planning and institutional research associated with teaching technologies. fulcrum for introducing future innovations. Provide experience to the IRC in outcomes assessment techniques. Section 8 asks for demographic information from the participant. A brief discussion of the survey follows. Two resources were found to be very helpful in the CONCLUSION construction of the survey (Sahin & Thompson 2006, and Mitra et al 1999). Since the survey Indeed, the survey is long. Automation or online will track the change over time in use of laptops entry will be very important for data collection. and the impact on teaching and institutional resources, it will be administered during the However, the major question related to the summer and fall of 2007 and again during the success of this survey is faculty acceptance of summer and/or fall of 2008. Since faculty the importance of this research. Hopefully, members have a dedicated desktop computer in faculty will agree that this survey will be an their office, a major change to explore is the important first step in the process of examining experience of faculty who will convert from desktop computers to laptop computers. The the impact of IIT in the classroom and using that survey can be found in Appendix B. Section 1 experience to become better teachers and a better of the survey addresses faculty members current institution. use of software applications on their desktop computers and Section 2 address their expected BIBLIOGRAPHY use of software applications on laptops. Both of these sections are designed to explore the Barak, M., A. Lipson, and S. Lerman. (Spring potential innovative impact of laptops. 2006). ―Wireless Laptops as Means for
Promoting Active Learning in Large Lecture Section 3 asks the participant where computers are used. This section is designed to explore the
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Halls.‖ Journal of Research on Technology in Gold, S. S. (July 2004). ―The Effect of Software Education. Volume 38, Number 3. Facilitated Communication on Student Outcomes in Online Classes.‖ The Journal of Educators Benbasat, I. and H. Barki. (April 2007). ―Quo Online, Volume 1, Number 1. vadis, TAM?‖ Journal of the Association for Information Systems. Volume 8, Issue 4, Article Goldstein, P.J. ―Information Technology 3, pp. 211-218. Downloaded on June 20, 2007 Funding in Higher Education.‖ Research Study from http://jais.aisnet.org. from the EDUCASE Center for Applied Research. Downloaded from Brooks, G., J. N. V. Miles, C. J. Torgerson, and http://www.educause.edu/ir/library/pdf/ers0407/r D. J. Torgerson. (June 2006). ―Is an s/ers0407w.pdf on June 14, 2007. intervention using computer software effective in literacy learning?‖ A randomised controlled Grant, M. M., S. M. Ross, W. Wang and A. trial. Educational Studies. Vol. 32, No. 2, pp. Potter. (2005) ―Computers on wheels: an 133-134. alternative to ‗each one has one.‘‖ British Journal of Educational Technology. Vol. 36, Brown, B. W. and C. E. Liedholm. (May 2002). No. 6, pp 1017-1034. ―Can Web Courses Replace the Classroom in Principles of Microeconomics?‖ American Hall, M. and K. M. Elliot. (2003). ―Diffusion of Economics Review 92, p444-448. Technology Into the Teaching Process: Strategies to Encourage Faculty Members to Characteristics of Excellence in Higher Embrace the Laptop Environment.‖ Journal of Education: Eligibility Requirements and Education for Business. July/August. Standards for Accreditation. (2006) Down loaded from http://www.msche.org on June 12, Laird, T. F. N., and G. D. Kuh. (March 2005). 2007. ―Student Experiences with Information Technology and Their Relationship to Other Davis, F. D., R. P. Bagozzi and P. R. Warshaw Aspects of Student Engagement.‖ Research in (1989). ―User Acceptance of Computer Higher Education, v46, n2, p211-233. Technology: A Comparison of Two Theoretical Models.‖ Management Science. 35(8), 982- Lansari, A. and A. Al-Rawi. (2007). ―Using an 1003. Outcomes-Based Information Technology Curriculum and an E-Learning Platform to Dittoe, W. (2002). ―Innovative Models of Facilitate Student Learning.‖ Issues in Learning Environments.‖ New Directions for Informing Science and Information Technology. Teaching and Learning. No. 92, Winter 2002. Volume 4. Downloaded on June 20, 2007 from Wiley Periodicals, Inc. http://proceedings.informingscience.org/InSITE2 007/IISITv4p461-471Lans361.pdf. Dodd, A. H. (2004). ―Accreditation as a Catalyst for Institutional Effectiveness. New Directions Lynch, T. (January 2002). ―LSU Expands for Institutional Research.‖ No. 123, Fall 2004. Distance Learning Program Through Online Wiley Periodicals, Inc. Learning Solution.‖ T.H.E. Journal, pp.47-48.
Finn, S. and J. G. Inman. (Spring 2004). Mandernach, B. J. (January 2005). ―Relative ―Digital Unity and Digital Divide: Surveying Effectiveness of Computer-based and Human Alumni to Study Effects of a Campus Laptop Feedback for Enhancing Student Learning.‖ The Initiative.‖ Journal of Research on Technology Journal of Educators Online, Volume 2, Number in Education. Volume 36, Number 3. 1.
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McLaren, C. H. (Spring 2004). ―A Comparison Russell, T. L. (1999). The No Significant of Student Persistence and Performance in Difference Phenomenon. Chapel Hill, NC: Online and Classroom Business Statistics Office of Instructional Telecommunications, Experiences.‖ Decision Sciences Journal of North Carolina State University. Innovative Education. Volume 2, Number 1. Sahin, I. and A. Thompson. (Fall 2006). ―Using Mitra, A., T. Steffensmeier, S. Lenzmeier and A. Rogers‘ Theory to Interpret Instructional Massoni. (1999). ―Changes in Attitudes Toward Computer Use by COE Faculty.‖ Journal of Computers and Use of Computers by University Research on Technology in Education. Volume Faculty.‖ Journal of Research on Computing in 39, Number 1. Education. Fall 1999, Volume 32, Number 1. Shachar, M. and Y. Neumann. (October 2003). Phipps, R. and J. Merisotis. (1999). ―What's the ―Differences Between Traditional and Distance Difference? A Review of Contemporary Education Academic Performances: A meta- Research on the Effectiveness of Distance analytic approach.‖ International Review of Learning in Higher Education.‖ Institute for Research in Open and Distance Learning, Higher Education Policy, Washington, DC. Volume 4, Number 2. Downloaded on June 19, 2007 from http://www.ihep.org/Pubs/PDF/Difference.pdf. Tan, C. L. and J. S. Morris. (2005). ―Undergraduate College Students, Laptop Prescod, F. (2003). ―Meeting the Challenges of Computers, and Lifelong Learning.‖ The the 21st Century: Examining the Impact of the Journal of General Education. Vol. 54, No. 4. Laptop Teaching/Learning Environment on Deep and Surface Learners - Initial Findings.‖ Tubaishat, A. and A. Bhatti. (2006). ―ICT Information Systems Education Journal, 1 (29). Experiences in Two Different Middle Eastern Downloaded on June 20, 2007 from Universities.‖ Issues in Informing Science and http://isedj.org/1/29/ISEDJ.1(29).Prescod.pdf. Information Technology. Volume 3. Downloaded on June 20, 2007 from Press, L. (2005). ―A Modular, Web-based http://proceedings.informingscience.org/ Introductory Programming.‖ Downloaded on InSITE2006/IISITTuba153.pdf. June, 18, 2007 from http://bpastudio.csudh.edu/fac/lpress/articles/draf Weaver, B. E. and L. B. Nilson. (Spring 2005). ts/ modulepaper.htm. ―Laptops in Class: What Are They Good For? What Can You Do with Them?‖ New Directions Rogers, E. M. (2003). Diffusion of Innovations for Teaching and Learning. No. 101, Wiley (5th ed.). New York: Free Press. Periodicals, Inc.
W. R. Eddins is an associate professor of information systems at York College of Pennsylvania.
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APPENDIX A
Type of Institution Cost of IT ($M)
Associate Degree 3.25
Bachelor 2.59
Master 5.76
Doctor 28.7
Specialized 6.59
Table 2 – Cost of IT by Type of Institution (Goldstein 2004, p44)
Figure 1 - Rogers' Adopter Curve (Wikipedia.org June 21, 2007)
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APPENDIX B – LAPTOP/DESKTOP SURVEY
Please provide the last four digits of your employee identification number (or some other code that you can remember for the post survey):
|____|____|____|____|
Section 1: Level of Current Computer Desktop Use Instructions: for each of the software applications below rate your current level of computer desktop use for instructional purposes (preparing lessons, delivering lessons, or to evaluate, communicate or keep grade records). Place your answer in one of the right-most columns by making an ―X.‖ Use the following definitions for your answers. Never means you do not use the software application. Rarely means you use it once a semester. Sometimes means once a month. Often means once a week. Very Often means daily use. Descriptions or uses of each application are given in parentheses next to the application.
I use the following application …
Never Rarely Sometimes Often Very Often 1) Word Processing (i.e., creating, storing, retrieving, formatting, spell-checking, and printing electronic text)
2) Spreadsheets (i.e., manipulating, organizing, and entering formulae and numbers)
3) Database Management (i.e., designing, creating, updating, and querying data stored in a relational format)
4) Classroom Management (i.e., online grade books, and course management systems such as Blackboard and/or WebCT)
5) Graphics (i.e., storing and/or manipulating picture, diagrams, graphs, symbols or other electronic images)
6) Presentation (i.e., create or manipulate slide-based presentations for public consumption)
7) Authoring (i.e., create interactive multimedia or computer-based training programs)
8) CD-ROM, DVD, or Web-based Interactive Content (i.e., maps, dictionaries, or geographic information systems)
9) Website Design Software (i.e., create and update html pages including text, graphics, or multimedia)
10) Email (i.e., sending, receiving, and organizing electronic messages)
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11) Internet Content (i.e., browsing, searching, observing content on the World Wide Web)
12) Data Analysis Software (i.e., using statistical techni-ques to describe, analyze, or interpret numerical data)
13) Simulations and Games (i.e., creating an environ-ment that models a system or provides entertainment)
14) Collaboration software (i.e., chat, discussion boards, and instant messaging)
15) Tutorials (i.e., using software that explains concepts, or uses exercise and practice techniques)
16) Discipline-specific Programs (i.e., software used primarily in your academic discipline)
17) Windows Operating System
18) Macintosh Operating System
19) College portal
20) Other:
Section 2: Expected Level of Laptop Use Instructions: for each of the software applications below rate your expected level of laptop use for instructional purposes.
I use the following application …
Never Rarely Sometimes Often Very Often 1) Word Processing (i.e., creating, storing, retrieving, formatting, spell-checking, and printing electronic text)
2) Spreadsheets (i.e., manipulating, organizing, and entering formulae and numbers)
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3) Database Management (i.e., designing, creating, updating, and querying data stored in a relational format)
4) Classroom Management (i.e., online grade books, and course management systems such as Blackboard and/or WebCT)
5) Graphics (i.e., storing and/or manipulating picture, diagrams, graphs, symbols or other electronic images)
6) Presentation (i.e., create or manipulate slide-based presentations for public consumption)
7) Authoring (i.e., create interactive multimedia or computer-based training programs)
8) CD-ROM, DVD, or Web-based Interactive Content (i.e., maps, dictionaries, or geographic information systems)
9) Website Design Software (i.e., create and update html pages including text, graphics, or multimedia)
10) Email (i.e., sending, receiving, and organizing electronic messages)
11) Internet Content (i.e., browsing, searching, observing content on the World Wide Web)
12) Data Analysis Software (i.e., using statistical techni-ques to describe, analyze, or interpret numerical data)
13) Simulations and Games (i.e., creating an environ-ment that models a system or provides entertainment)
14) Collaboration software (i.e., chat, discussion boards, and instant messaging)
15) Tutorials (i.e., using software that explains concepts, or uses exercise and practice techniques)
16) Discipline-specific Programs (i.e., software used primarily in your academic discipline)
17) Windows Operating System
18) Macintosh Operating System
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19) College portal
20) Other:
Section 3: Frequency of Computer Use Instructions: for each of the items below rate how often you have computer access for instructional purposes.
I use computers for instructional purposes…
Never Rarely Sometimes Often Very Often 1) In my office.
2) In most classrooms where I teach.
3) In my home.
4) In a computer lab.
5) In a library or media center.
6) Other:
Section 4: Access Limitations to Computers
Instructions: for each of the items below rate the extent to which you think the following factors limit your access to computers for instructional purposes. Place your answer in one of the right-most columns by making an ―X‖ under the option that most closely matches your level of agreement or disagreement.
I feel that I am limited in access to computers for instructional
purposes because…
Strongly Disagree Disagree Neutral Agree Strongly Agree 1) Not enough computers.
2) Not enough computer licenses.
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3) Outdated or incompatible computers.
4) Outdated or incompatible software.
5) Unreliable computers and/or software.
6) Lack of appropriate instructional software.
7) The Internet is not easily accessible.
8) Lack of support regarding ways to integrate computers into the curriculum.
9) Lack of technical support.
10) Lack of time in schedule to use computers for instructional purposes.
11) Lack of training on existing computers and software.
12) Other:
Section 5: Your Attitude to the Use of Computers Instructions: for each of the items below rate your attitude toward computers as tools for instructional purposes.
Strongly Dissagree Disagree Neutral Agree Strongly Agree 1) I think that using computers improves the quality of teaching I do.
2) I think that using computers fits well with the way I like to teach.
3) I think that learning to use computers is easy for me.
4) I feel comfortable using computers.
5) Computers make learning easier and more efficient.
6) I prefer to deliver lessons using computers.
7) The use of email gives me easier access to colleagues, administrators, and students.
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8) I am fearful about computer use.
9) I expect all faculty members to use computers for instruction.
10) Computer use increases my usual workload.
11) My students expect me to use computers for instruction.
12) Other:
Section 6: Your Feeling Concerning the Support You Receive Instructions: for each of the items below rate your feelings about the IT support that you receive to use computers for instructional purposes.
Strongly Dissagree Disagree Neutral Agree Strongly Agree 1) I have had a great deal of opportunity to try various computers for instructional purposes.
2) In the college, many people use computers for instructional purposes.
3) I have access to consistent hardware and software updates.
4) I receive timely technical support and maintenance of computers.
5) I have access to workshops and/or training on computer use.
6) Overall, the administration feels that computers are important for instructional purposes.
7) My colleagues provide assistance with hardware and/or software updates and/or technical support.
8) My colleagues discourage computer use.
9) My colleagues share information and ideas about computer use.
10) My colleagues make an example of a good model of computer use.
11) When learning new uses of computers, I prefer one-on-one assistance from undergraduate students.
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12) The administration provides adequate support in terms of computer accessories.
13) I feel that the current computer rotation policy which changes out computers every three years is appropriate.
14) Other:
Section 7: Your First Use of Computers for Instructional Purposes Instructions: choose one of the items below to describe your use of computers for instructional purposes. Best Describes Me 1) I was using computer technology for instructional purposes before my colleagues were using computer technology for instructional purposes.
2) I became one of the first faculty members to use computer technology for instructional purposes, because of the success of other colleagues.
3) I was not one of the first faculty members in the college to begin using computer technology for instructional purposes, but used it ahead of most of my colleagues.
4) I used computer technology for instructional purposes later than most of my colleagues.
5) I was among the latest faculty at my institution using computer technology for instructional purposes.
6) I have not used computer technology for instructional purposes.
Please give a reason for the category you selected in the space below:
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Section 8: Your Demographic Information Instructions: please answer the following demographic or general questions by circling the best answer. 1) What is your gender? 6) What is your age?
Female Male 20-29 30-39 40-49 50-59 Over 59
2) What is your academic rank? 7) Including the current year, how many years have you been teaching in higher education? Lecture/instructor Associate Prof. 1-5 6-10 11-15 Assistant Prof. Full Professor 16-20 Over 20
3) What is your department? 8) Including the current year, how many years have you been using computers in general? 1 - Beh. Science 6 - His. & Poly.
2 - Bio. Science 7 - Mus. Art & Com. 1-5 6-10 11-15 3 - Bus. Admin. 8 - Nursing
4 - Education 9 - Phy. Science 16-20 Over 20 5 - Eng. & Hum. 10 - Schmidt Lib.
4) Do you have a computer at home? 9) What is the average number of students that you teach in one semester? Yes No 1-50 51-100 101-150 151-200 Over 200
5) Do you have a computer in your office? 10) How many graduate students do you currently supervise? Yes No 0 1-2 3-4
5-6 7 or more
11) If you have any other comments regarding faculty use of computers for instructional purposes, please give them here.
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ASSESSING DIVERSITY OUTCOMES IN A COLLEGE OF BUSINESS MANAGEMENT CURRICULUM Anne M. McMahon, Youngstown State University Andy Chang, Youngstown State University Carolyn K. Mikanowicz, Youngstown State University C. Louise Sellaro, Youngstown State University
ABSTRACT Standards for undergraduate education require assessment of learning outcomes for key objectives of the curricula. For business education, assessment of diversity competence objectives is required by the AACSB, the premier accrediting body for Colleges of Business. This paper reports on the results of one College of Business‘s efforts to understand self reported, diversity competent conduct in a work setting. The analysis compares results from students taking a course dedicated to managing diversity with those from students taking another course at approximately the same level. We have published a paper reporting an analysis of data collected in 2001 on measures taken before and at the end of the courses. The data were student self-perceptions of their likely actions in the workplace. The results of that assessment appeared to confirm that the students in the diversity course experienced changes directly connected to the course goals and that all students showed modest improvement in self reported diversity competent actions. The data reported here are results of a replication of that earlier design in later semesters of 2001, 2002 and 2006. The overall results replicate the results of the earlier study for the effects of the diversity course. In addition clear changes were observed when gender was introduced as a variable. In this dataset, men‘s initial scores were lower than women‘s scores without exception. At the end of the semester, men‘s scores increased while women‘s scores remained the same or decreased. Analysis of the data over the full time period suggests that the student populations were comparable at the beginning of the semesters, thus there did not appear to be effects due to changes in the larger culture from 2001 to 2006. It appears that the variables, gender, course and year, each affected different items in the survey.
INTRODUCTION is seen as essential to being competitive in an increasingly global market place and in diverse Diversity training in business in the United States has employee labor markets. (De Anca and Vazquez, become an ordinary part of employee orientation and 2007) development (Holladay et al., 2003, 246). About two-thirds of employers provide diversity training. Diversity education in colleges of business mirrors (Compensation and Benefits for Law Offices, 2006) the developments in business practice. Accrediting Since the turn of the century, the training has agencies such as AACSB explicitly include criteria expanded from an emphasis on equal opportunity addressing diversity issues. Increasingly, those themes, typical of diversity training in business since criteria specify assessing outcomes in preference to the 1960‘s, to include an emphasis on diversity measures of attitude and satisfaction. There does not competencies necessary for effective business appear to be any standardization of diversity strategy and on assessing effects for business education in Business Schools in the U.S., nor is it outcomes. (Holladay et al, p. 246) Diversity typical to have a dedicated course in this area. Many competence (at both the system and individual levels) programs now require explicit curricula coverage of
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globalization and strategy, but human resource work organization. (Stinson, 1991) Although still an strategies and diversity strategies are still somewhat indirect measure, the tool avoids the practice of underdeveloped in business curricula. Assessment of asking about beliefs and attitudes toward particular diversity competence tends to emphasize inclusion of groups of people. The course did not have explicit various demographic groups among employees and prejudice reduction goals; rather it set goals for students, as well as inclusion of perspectives by competencies in work settings. The main results of representatives of those groups in instructional the study reported earlier indicated that both groups materials. Diversity skill outcomes are not commonly of students were comparable on their initial responses assessed. Frequently, diversity assessment aims at prior to their courses, and that both groups changed identifying changes in attitudes towards others who over the course of the semester. (McMahon et al., are different. (Hogan and Mallott, 2005; Malkin and 2002; McMahon and Sellaro, 2005) The results Stake, 2004) demonstrated that students in the Managing Diversity course changed more than those in the comparison Assessment in both business practice and business group and on different items, ones judged to be education tends to involve non-causal research related to the course objectives. Those results also designs. Business education and business practice suggest that students change due to factors outside have not yet created research alliances addressing the the Managing Diversity course. That initial processes of change related to diversity intervention. assessment did not identify results by demographic (Paluck, 2006, p.579) As a result, diversity characteristics of the respondents. Only gender assessment is largely non-theoretical. Not much is permitted such analysis, since representation by other known about the process of change involved in demographic groups was too small. Unfortunately, diversity training or education. (Malkin and Stake, gender data were not collected at that time 2004) Research designs do not separate the effects of the course from larger societal process effects. Thus The same tool and courses were again used to gross statistical effects about attitude changes, replicate the assessment in the following semester of prejudice reduction or satisfaction with the 2001, again in 2002 and in 2006. Those results are training/educational experience tend to be modest the subject of the analysis reported here. In response and short lived. (Hogan and Mallott, 2005, 122) to the literature, we included gender as a variable to Results across studies are often not comparable. The be analyzed. The population of students in the literature, then, does not yet yield cumulative results, courses did not permit statistical analysis of other emergence of common tools or strategies, or demographic groups. The objectives of the analysis information about effects over time. (Paluck, 2006) are to address the following three topics:
ASSESSING DIVERSITY CHANGES IN A Are the results of the earlier initial assessment MANAGEMENT CURRICULUM robust? The initial assessment analysis showed high reliability of the tool. Nevertheless, over In response to accrediting criteria and in an effort to the time frame of the data reported here, the understand what, if any, impact a course in Managing culture at large may have changed. In addition, the literature suggests that assessment of attitude Diversity might have, the authors undertook a causal change due to diversity education and training research design involving before and after measures are modest and short lived. (Hogan Marvin and of student reports about actions they might take in an Bryons, 1999; Malkin and Stake, 2004) It is organization in which they work. Responses of possible that the earlier results were a one-time students in the Managing Diversity Course were artifact of the moment due to unknown factors. compared with those of students in a comparable Is there evidence of change over the years in the course that did not emphasize diversity. The authors initial responses of students? Do the students used a tool that asked students to report on 40 appear to be different prior to taking the course over the years? possible items about actions they might take in a Does gender impact the pattern of results?
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causal factor attributable to discrimination. (McMahon 2007; Brush et al. 2004)
Mavin and Bryans (1999) argue that Understanding change in student responses over Business/management schools replicate those time patterns in the structures and culture of their education programs. At the turn of this century, men Causal designs of the sort used here do not dominated the status and reward structure of U.S. automatically generate results that have clear business education institutions (Shirley, 1998). interpretations. Our initial study involved efforts to Business Education assumes students are document the tool used as highly reliable. Since the homogeneous with regard to their educational needs results showed high reliability, we then expected that and expected outcomes. The educational content, changes in student responses in later semesters for culture and practices emphasize the male experience. the data reported here can be interpreted as real They are aimed at high level corporate jobs in large, changes in the populations of students in our courses. for-profit systems. The classroom culture tends to be That interpretation entails some assumptions. The gender neutral or follow norms for successful men‘s design does not actually specify or test any claims experience. Mavin and Bryans (1999) found in a about the connections of course events to a change study of top level CEO‘s that the few women in those process that might account for differences between positions mirror their male counterparts in several groups over time or between before and after results ways. They are taller and speak more loudly than within groups. Our efforts here are exploratory and others around them, including men. They also formative in intent. That is, we hope to learn acknowledge that their success required that they something through replication about how to come to terms with and compete in a culture understand our assessment results over time and to dominated by male to male norms. Management inform use of those results in curriculum and education tends not to acknowledge gender based assessment revisions. patterns in the business world and does not include Investigating effects of student gender gender issues in such areas as human resource strategy, differential career behavioral norms, small Men and women have different experience in the business strategies, and social responsibility courses. U.S. labor force (Bell, 2007, Chapter 9). They generally work in gender-segregated jobs. They It is not surprising, then, that there is some evidence work in different industries and occupations. that men and women approach diversity training and Economists refer to a dual labor force describing the education with different attitudes. (Hogan and relationship between jobs and the labor market. Mallott, 2005; Malkin and Stake, 2004). Holladay et Women‘s work is significantly less well paid than al found that men approach descriptions of diversity men‘s work. Even though MBA graduates in the training more negatively than do women. (2003). U.S. start out with comparable incomes, within a year Concern about initial white male backlash and beliefs a gap appears and widens each year there after. about ―reverse discrimination‖ is common place Studies document the significance of gender in today. In the data reported here, we included gender gaining access to top positions in corporate boards as an analysis variable. It allows us to learn about the and hierarchies. Women leave the labor force more possible effect of demographic differences on our than men do and are the largest, most successful results (gender being the only one available to us), group of small business owners. Women‘s small and it may allow us to interpret changes, if any, due businesses do not have access to the same level of to the managing diversity course. It may be that capitalization as do those owned by men. Studies students in all the courses view the measurement tool investigate many explanations for the gender through ―gendered‖ perspectives. However, we differences, but there always remains a ―residual‖ would expect the Managing Diversity Course to
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impact the effect of gender at the end of the course, and 46.4% for the male 84 subjects from all the valid whereas that would not be expected for the other cases. Among these subjects, 79 (44%) of them were classes. It is possible, however, that the gendered from diversity courses and 102 (56%) were in non- perspectives reflect the overall curriculum, not the diversity courses. measurement tool or the topics of the Managing Diversity Course. Change over years during which data were collected: THE DESIGN The chi-square test of homogeneity was performed The research design replicated that of the initial study on all 40 items for comparing the initial responses already published. (McMahon et al., 2002; McMahon from all three years of data. There were no evidence and Sellaro, 2005) The tool consists of a 40 item of significant change over the years in initial survey that asks students to rank how likely they are responses except for items 4 (Refuse to participate in to take particular actions in a work organization. jokes that are derogatory to any group, cultures, sex, (Stinson, 1991) Four response categories range from or sexual orientation) and 6 (Check out reality before ―almost never‖ to ―almost always.‖ In every case, repeating statements or rumors or assumptions about the almost always category is the more competent anyone). response, Analysis and interpretation did not follow Table 1.a. The Count and Percentage Distribution for Question 4. that suggested by Stinson (1991). Instead, the initial responses were compared by gender of respondent 4. Refuse to participate in jokes that are derogatory to any group and year. In addition, responses before and after the Almost Almost Year Seldom Usually Total course for each group were compared for changes. Never Always
Effects of the managing diversity class were analyzed 2001 4 | 7% 13|22% 28|47% 14 | 24% 59| 100% by comparing changes reported by students in that 2002 2 | 4% 26|52% 15|30% 7 | 14% 50| 100 % class with those by students in a comparable level course in the management curriculum. The courses 2006 8 | 11% 17|24 % 33|46 % 14 | 19% 72| 100% were taught by the same teachers (both female) who taught the same classes used in the initial study. Both teachers use pedagogy that engages students with Table 1.b. The Count and Percentage Distribution for Question 6. each other in ways that create a high rate of 6. Check out reality before repeating statements or rumors about any interaction among them, likely creating cohesion one Almost Almost Year Seldom Usually Total among them. (Malkin and Stake, 2004; Holladay et Never Always al, 2003) Data analysis was performed using SPSS 2001 0 | 0% 6|10% 29| 49% 24 | 59| 100% version 15. Descriptive statistics were obtained, and 41% Chi-square Tests for homogeneity, logistic 2002 0 | 0% 12|24% 24| 48% 14 | 28% 50|100 % regression, and Sign Tests were conducted to provide 2006 0 | 0% 9| 13 % 46| 66% 15 | 21% 70| 100% exploratory data and to answer the research questions associated with this investigation. These results suggest that, for the most part, the RESULTS AND DISCUSSION students‘ diversity competence, as self reported on The data were collected from three waves of this survey, remained about the same over the time assessment surveys in years 2001, 2002, and 2006. studied. It may be that there has been little change in Out of total 228 surveys collected, 193 of them are the larger community in which the university valid for pre- and post- analysis. Gender information functions. There has been a significant increase in was available for 181 of those cases. Gender was diversity-related programming on campus over since evenly distributed in the collected data for each year 2001. It does not appear to impact the students on with overall rates of 53.6% for the 97 female subjects these items prior to taking the class. It may be that
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students use their work culture more than the campus to have an increase in post-survey response rank culture in reporting actions on the survey. Certainly score than female. Subjects from year 2002 were less the survey asks them to do that. Informal likely to increase in post-survey response rank score observations by the teachers, based on other than subjects from 2001, since the odds ratio (0.266) assignments and class discussions, suggests that was less than 1. Gender significance was found in virtually all the students work, they report a wide seven survey questions with all having male with range of diversity cultures in their work settings, and higher odds of having increase in response rank they tend to be resistant to diversity messages when scores. Most of the significance from year variables seen as possibly constraining employers‘ actions. also indicated increase in response rank comparing recent year with the past. Three of the questions Effects of the Gender Variable: showed that subjects in diversity course had an increase in response rank scores. For question 38, In the process of this analysis, the response categories significance was found for both year 2002 and 2006; were rank-scored with 1, 2, 3, and 4, from Almost the odds of increase in response rank scores in both Never category to Almost Always. When examining years were higher than year 2001. the responses from all 40 assessment items, the initial response (pre-survey) average rank-scores from male Table 2 shows that the various variables, gender, year students were consistently lower than female students and course, impact different items of the survey. without exception. This suggests that our initial study may have confounded such effects, attributing them all to the To model the change in response from pre-survey to effects of the diversity course. post-survey, a variable was created to identify decrease, increase, or unchanged in the pre- and post- Course Effects on change in competence: survey responses. This variable indicates the change of responses between pre- and post- survey Table 3, also in the Appendix, shows the items that responses. The issue of change was then modeled by were significant in the study for both groups of multinomial logistic regression with year, sex, and subjects, i.e., subjects in diversity courses and diversity course student (or not), as the explanatory subjects not in diversity courses. These two groups variables. The explanatory variables are all indicator were understood as experimental and control groups. variables and there were no significant multicollinearity from the collinearity analysis. The The results are very similar to the outcomes from the model fits the data well, and passed the Pearson‘s initial study already reported. The sample size in this goodness of test at 5% level for modeling almost all study is larger than the sample size in the initial survey questions except for question 24 that has a p- study. Therefore, it is reasonable that this study value of 0.038. The adjusted odds ratios and the p- picked up a few more significant items. Five out of values for the significant factors are reported in Table the seven items in the non-diversity course group had 2 in the Appendix. The adjusted odds ratios were the same outcomes as the diversity course group. calculated for the odds of having increase versus When comparing the pre-course responses between decrease in response rank on the survey questions. diversity versus non-diversity groups year by year An increase response rank indicates improved using Chi-square test of homogeneity for each of the diversity competence as measured by this survey. three years 2001, 2002, and 2006, only three items The statistics for the comparison with the unchanged were found significant at 5% level for year 2001. category are not reported in the table. They are question 23 (p = 0.002), question 31 (p = To understand Table 2, for Q1, the odds of male 0.015), and question 33 (p = .024). This means the subjects having an increase in post-survey response subjects in this study most likely had the same the rank score is more than 3.8 times the odds of female baseline situation. In the initial study reported earlier, subjects. That means male subjects were more likely there were 6 items that had significant differences
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between diversity and non-diversity course groups in Since our results are consistent over time and since pre-course responses. The difference between they report gender effects as well as course effects, diversity and non-diversity course groups on their we are persuaded us to move away from the tool used responses prior to taking the course was significant in this study as well as other such tools. The on items 33 for both this study and the data from the literature suggests that findings from all such tools initial study reported earlier. In the combined data, are generally modest and may be short lived. only two items, questions 16 and 33, were significant Replicating this design will not be needed for 5 years. at 5% level. It is, however, increasingly important to identify direct measures of at least some action competencies These results do replicate the earlier study in that and to gain some sense of the stability of changes they do show that the Managing Diversity appears to related to the course. At the moment we are positively affect change in diversity competent self- experimenting with listening skills and use of non- reported conduct. Similarly, students in the non- inclusive and other language patterns. diversity course also experience some modest change. The changes are modest but persistent, a Conceptualizing the change process: Move from pattern that is reported as typical in the literature. complex pedagogy models and dynamics of prejudice Both students whose results are reported here and models to models of direct connections between those in the initial study, tended not to use the entire course material and skill outcomes. response range of the tool; responses clustered around ―seldom‖ and ―usually,‖ with ―almost No causal statistical design replaces the importance always‖ coming in third in frequency of being of a strong conceptualization of the change process selected. The responses indicated that the students being claimed. As in our situation here, introduction and their responses were not statistically different of new variables (e.g. gender) can change apparently from each other prior to the courses, except for a clear outcomes to ambiguous ones. In our situation, couple of items. When gender was introduced, the since pedagogy had strong similarities across the results showed that men and women students diversity and non-diversity courses, since our responded differently. Men‘s initial scores were population of students appear comparable over time, lower than women‘s scores. At the end of the and since the tool used so far indicates high reliability semester, men‘s scores increased for all groups while and consistent results over time, it now seems women‘s scores remained the same or decreased. appropriate for us to expand our assessment efforts at clarifying skill outcomes connections to properties of Since the changes are modest and because they are so the course content and assignments strongly influenced by gender, the meaning of our earlier results regarding the effects of the managing Challenges with longitudinal assessment: diversity course (and of our data here) is uncertain. In Decompose the components of longitudinal addition, we cannot tell whether the gender effects assessment assumptions. are impacted by the Managing Diversity course more That a pattern of results repeats over many years does than a possible gendered orientation of the larger not confirm that those results are long lived for any curriculum and the regions business culture. of the respondents in any one of those years. Finding RECOMMENDATIONS that the respondents in three groups over 6 years are comparable at the onset of the assessment experience Selecting Tools for Assessment: Switch from does not tell us how to understand why that is so and attitude measurement and from self responses to what might cause that pattern to change. In the hypothetical events to measures of direct assessment absence of conceptual work, interpreting longitudinal of skills. data is not straightforward. Effects of change external to the training process are hard to separately identify. Our results do suggest that the population
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served in the classes studied have remained fairly work experience and goals don‘t fit the normative homogeneous over half a decade with regard to the preferences of business education. diversity items in the tool used, even when gender is statistically controlled. This result affirms the need for diversity education and that such education can REFERENCES have continued relevance over a period of years. Bell, K. (2007). Diversity in Organizations. Ohio: Business Education Systems and Diversity Thomson South-Western. Outcomes: Assess gender dynamics in all further assessment efforts. Put gender on the agenda for Brush, C. G., Carter, N. M., Gatewood, E., Greene, P. program assessment as well. G., and Hart, M. M. (2004). Clearing the hurdles: women building high-growth businesses. Upper Further assessment should investigate patterns that Saddle River, NJ: FT/Prentice Hall. reflect institutional effects of the entire program. We know that the experience of women and men in Compensation and Benefits for Law Offices. (2006). business, for example, is very different. Since other The new data on diversity training. 6(1), 9. minorities often participate in the labor force through the female labor market, it is possible that business De Anca, C. and Vazquez, A. (2004). Managing education is systematically white male oriented. This Diversity in the Global Organization. Upper will impact students‘ responses to curricula, course Saddle River, NJ: FT/Prentice Hall. material, pedagogy, and perceptions of relevance. Hogan, D. E., and Mallot, M. (2005). Changing The model of assessment consistent with that Racial Prejudice Through Diversity Education. possibility and with our results here is not new to Journal of College Student Development, 46(2), 115- higher education. Health Care education has 125. addressed institutional dynamics related to health Holladay, C. L., Knight, J. L., Paige, D. L., and care gaps and professional education for some time. Quinones, M. A. (2003). The Influence of Framing (Nelson et al 2003) The new consensus is that on Attitudes Toward Diversity Training. Human reducing disparities in care and service requires Resource Development Quarterly, 14(3), 245-263. strategies that address health care systems, providers and their patients. The structures and culture of Malkin, C., and Stake, J. E. (2004). Changes in health care education require comprehensive change Attitudes and Self-Confidence in the Women‘s and based on evaluation of the educational culture and Gender Studies Classroom: The Role of Teacher setting, curriculum content, and the settings in which Alliance and Student Cohesion. Sex Roles, 50(7/8), care is delivered. The same may be true for business 455-468. education (Mavin, and Bryans, 1999). Business education tends not to serve the needs of small Mavin, S. and Bryans, P. (1999). Gender on the businesses. Indeed, the emphases in business agenda in management education? Woman in education may well create a culture about ―success‖ Management Review, 14(3), 99-104. in business defined on big size, big profit, and manufacturing. Business educators may not have McMahon, A. M. (2007). Women‘s good awareness of gender issues, and perhaps Entrepreneurship Can Lead Economic Growth: diversity issues in general. Indeed, they may not Success of women-owned firms occurring as are have strong competence in the many areas in which other changes in the workplace. The Business many business professionals lead success defined by Journal, 23(16), 13. other criteria. This might be apparent to those whose McMahon, A. M., and Sellaro, C. L. (2005). Learning from Diversity Training: Outcome
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Assessment Strategies. The 2005 Pfeiffer Annual: Paluck, E. L. (2006). Diversity Training and Training, 149-157. Intergroup Contact: A Call to Action Research. Journal of Social Issues, 62(3), 577-595. McMahon, A. M., Mikanowicz, C. K., and Sellaro, C. L. (2002). Boundary-Spanning Classrooms: Shirley, L. (1995). Why are there so few female Creating Diversity Learning. Presented at the academics at Durham University? Unpublished Thirteenth International Conference on College postgraduate project, PG Dip/MA HRM, Newcastle Teaching and Learning, Jacksonville, FL, April Business School. 2002. Stinson, K. (1991). Diversity Awareness Profile. Nelson, A. R., Smedley B. D., and Stith A. Y. (2003). San Francisco: Jossey-Bass Pfeiffer. Unequal Treatment: Confronting Racial and Ethnic Disparities in Health Care. Washington, D.C.: The National Academies Press.
Anne M. McMahon is a professor of management at Youngstown State University. She received her PhD in Sociology from Michigan State University. Her other research interests include voluntary participation in organizations, workplace diversity, and human behavior in organizations.
G. Andy Chang is a professor of Mathematics and Statistics at Youngstown State University. He received his PhD in mathematics from Texas Tech University. His other research interests are statistics in economics, finance, online education, and politics.
Carolyn K. Mikanowicz is Professor of Health Professions at Youngstown State University. She received her PhD from Penn State University in the health education department. Her other research interests are distance education and diversity.
C. Louise Sellaro is Professor of Management at the College Business, Youngstown State University. She received her DBA in administration sciences from Kent State University. Her other research interests include the impact of culture on learning styles of students and on the development of distance education pedagogy.
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Appendices
Table 2. Significant Factors for the Increase In Response Rank and Odd Ratios.
Diversity Gender Question p p 2002 OR p 2006 OR p Course OR (M) OR
Q1 - - 3.822 .023 0.266 .049 - -
Q3 - - 2.318 .080 - - - -
Q4 - - 2.437 .064 - - - -
Q5 - - 2.229 .077 - - - -
Q6 0.380 .039 - - 3.415 .059 - -
Q12 - - 3.083 .023 - - - -
Q17 - - - - 3.386 .046 4.963 .006
Q22 ------2.601 .084
Q23 ------4.212 .005
Q24 ------0.345 .038
Q26 - - 2.170 .068 2.853 .056 - -
Q27 2.169 .087 ------
Q33 2.384 .046 ------
Q35 2.829 .027 ------
Q36 ------2.710 .091
Q38 - - 2.279 .077 6.170 .005 4.854 .003
The odds ratios are the odds of increase in response rank in the post survey.
The ―p‖ column contains p-values for indicating statistical significance.
This table displays the statistics only for factors that are significant at 10% level.
Baseline for Odds Ratios:
The baseline category for sex variable is female. The baseline category for year 2002 and 2006 is 2001. The baseline category for the Diversity Course is student not in diversity course.
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Table 3. Sign Test (Pre/Post) p-values for Statistical Significant Changes.
Diversity Non-Diversity Question Course Course (n = 79) (n = 102)
Q1 Challenge others† .000*** .000***
Q2 Speak up .001** .004**
Q3 Think about impact† .049* -
Q4 Refuse to participate .025* .001**
Q6 Check out reality - .026*
Q7 Recognize bias† .029* -
Q15 Learn about other cultures† .024* -
Q16 Ask for and plan social events .025* -
Q17 Encourage protected-class members to speak up - .037*
Q18 Encourage protected-class members to take risks† .010* -
Q33 Confront policies that lead to exclusion† .001** -
Q35 Make extra efforts to educate myself† .000*** -
Q36 Protest a bias or prejudice† .000*** .000***
Q37 Refuse practices that are biased .015* -
Q38 Participate in change-agent efforts .001** .015*
Q40 Say, I think that‘s inappropriate† .009** -
* Significant at 5% level; ** significant at 1% level, *** significant at 0.1% level.
† Items that were significant in 2001 study. It covers 9 out of 12 items that were significant for the experimental group.
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KNOWLEDGEABLE DECISION MAKING: DOES SOURCE OF KNOWLEDGE IMPACT EFFECTIVE USE OF INFORMATION TECHNOLOGY? CJ Rhoads, College of Business, Kutztown University
ABSTRACT The purpose of this research is to establish whether or not the type or number of sources of knowledge used by the decision maker about information technology impacts how effectively an organization utilizes information technology. A one sample chi-square test showed that organizations that used local consulting firms for their knowledge or read print or web publications used technology more effectively. Decision makers who relied on the advice of friends and family did not utilize technology as effectively. On the other hand, there was no difference in the effectiveness of technology use among organizations where the decision maker used top research vendors (such as Gartner Group, Meta Group, Forest, etc.) for their knowledge or directly from the technology vendors themselves.
INTRODUCTION33 Poston & Grabski, 2000; Remenyi, Money, & Sherwood-Smith, 2000) Dedrick, Kraemer, and In the research, debate rages on about whether or not Gurbaxani (2003) conducted a review of more than information technology is a good strategic investment 50 empirical research articles on IT and its economic for a corporation. Early research (from the 80s and performance between 1985 and 2002 (Dedrick, early 90s) failed, time and time again, to find any Gurbaxani, & Kraemer, 2003). They acknowledge relationship between the amount of money spent on that earlier research failed to establish a strong technology and the benefits obtained from correlation between IT spending and economic technology (Dehning & Richardson, 2002; Schrage, benefits for a company. Dedrick et al, however, feel 1997; Strassmann , Paul A., 1999; Tallon, Kraemer, that newer research strongly supported productivity & Gurbaxani, 2000). This lack of empirical support gains of IT. Furthermore, they found that the gains for IT investment had been dubbed the "Productivity came not just from the newer technologies such as Paradox"(Black & Lynch, 2001; Lucas, 1999; the Internet, but rather from the capital investments Strassmann , Paul A., 1999; Thorp, 2003; Willcocks of a decade earlier. Rather than conclude that earlier & Lester, 1999). IT implementations were not successful, Dedrick et al considered the possibility that new econometric However, during the height of the dot com boom techniques combined with firms learning to measure much of the research turned positive again. In 2001 IT expenses more accurately and apply IT capital Brynjolfsson (Brynjolfsson, Hitt, & Yang, 2002) more productively was the cause for the change. conclude that for each dollar of installed computer Dehning and Richardson (Dehning & Richardson, capital in a firm, the market value of the firm rises at 2002)came to the same conclusion in their research least five dollars (although they admit that the synthesis. To quote them, "The question changed increase is disproportionate to the cost). (Frank from 'Is there a payoff?' to 'When and why there is a Bannister, Dan Remenyi, 2000; Plotnick, 2000; payoff?'.
Bucatinsky (Bucatinsky, 1996) noted that the biggest 33 I thank Mike McCarthy from the Berks County key was not in spending money on technology, but in Chamber of Commerce and John Weidenhammer using it effectively - especially in small businesses. from Weidenhammer Systems, as well as the Tallon (Tallon et al., 2000) surveyed 304 business Reading Eagle Company for their help, support, and executives and concluded that firms with IT that pays funding for this project
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off economically for the company have more focused Bergman and Feeser (2001) finds that cultural goals and utilize the technology more effectively. communication preference impacts the use of information technology within the decision making Intuitively, one of the keys in using technology process. They identify and study 17 decision effectively has to be the knowledge of the decision attributes that are related to IT usage. (Bergman & maker regarding which information technologies to Feser, 2001) purchase and how to implement them within the organization. The question is: How do decision Decision speed makers get their knowledge about information Information overload technology? Routinization of decision making Forecast accuracy The leadership in most organizations are experienced Decision time horizon executives - which requires that they've been in Problem formulation Data quantification business for a number of years. Often, executives Decision effectiveness went through school and were well into their careers Alternatives generated when information technology was still behind glass Extent of analysis windows and touched only by systems specialist. Problem identification Those days are gone, and decision makers in every Data availability organization must learn enough about information Job complexity technology to make good decisions about business Timeliness of data strategy - which is inexorably linked to information Data accuracy Decision communications technology. But where do they go for IT knowledge? Decision participation Do they rely upon free advice from their family and friends? Do they pay top dollar for information Benamati (2001) includes decision making styles as a technology research groups such as Gartner Group, factor on the level of technology knowledge transfer Meta Group, Forrester, McKinsey, IDG, and many (which could be construed as highly correlates with others? Do they trust the vendors such as Microsoft, reported use of technology). Benamati finds that Hewlett-Packard, Dell, Gateway, Oracle, SAP, Intuit, corporations with more formalized mechanistic or any other manufacturer or publisher of information structures and more stable direction-oriented cultures technology? Do they read publications such as are associated with higher levels of knowledge Computerworld, CIO magazine, Optimize, transfer of technology. Conversely, research Informationworld, Informationweek, or any one of organizations with more organic structures, more hundreds others? Do they obtain knowledge via the flexible change-oriented cultures, and more web either through sites related to the publications, or customized university policies for intellectual through any one of the hundreds of consumer product property rights, patent ownership, and licensing are comparison sites such as Consumer Reports or Tech associated with higher levels of technology transfer. Republic? And does the source of their knowledge Another major impact is the partnership between the have any relationship at all with whether or not they corporation and research organization. A trusting are using information technology effectively? relationship in its university research center partner increases technology transfer.(Benamati & Lederer, LITERATURE REVIEW 2001).
There have been quite a few studies on decision One research project studied the effects of using a making that includes IT influences. O'Donnell and hypermedia-based prototype of collective memory David (2000) studied 15 journals and came up with (i.e. a virtual meeting collaboration system called 57 articles on decision making being influenced by VisionQuest) on cognitive-conflict type of decisions information technology. (O'Donnell, E. and David, J. (in this case, investigating MBA programs). The S., 2000) results indicate that the use of collective memory
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information provides the study participants focused topics that is available for a price from any one of the attention on the cognitive-conflict task domain and numerous research organizations catering to the leads to faster decision-making. One of the factors vendors of information technology products and studied was how thorough the analysis was prior to services (so that they can sell more products and making the decision, which included how many web services, of course). In addition to the basic problem pages of information were read and how many of bias, the biggest difficulty with these studies is the attributes were identified. The study found that the source of the sample. In general, they pull from the control group (the one that did not use the readers of technology publications or buyers of the collaboration system) read more web pages and vendor's technology. Furthermore, the most common investigated more attributes before making the methodology itself (web based surveys involving a decision. However, the study restricted the source of URL sent out in email) introduces another bias. There information to web sites, however, and did not allow have been studies that identify ways to decrease the other sources of information. (Paul, Haseman, & impact that the technology bias produces on the Ramamurthy, 2004) results (Burkey & Kuechler, 2003). However - when the topic of study is the source of information in Yu and Chang (2002) were interested in how technology decision making or effective technology information technology can help decision makers, use, web-based surveys would have a tendency to and so they investigated the decision making process attract more answers from technology-literate itself. One of the issues they noted was in agreement organizations, introducing an inherent bias within the with top issue listed by Bergman: information sample itself. In any case, the existing information overload. The fact that although information on where decision makers go for information on technology may be able to make the process of information technology is for the most part unusable. making a decision easier, the existence of too much information has caused a problem. Yu and Chang Lack of unbiased empirical research on the use of define information overload as "a perception by a various sources of knowledge within the decision person that the information associated with work task making process may be a side effect of the relative is greater than that can be managed effectively, and a newness of information technology. However, the perception that such overload creates a degree of existence of the same problem in more established stress for which the coping strategies are ineffective." fields such as healthcare might refute that claim. They felt using information technology may help Clancy and Cronin (2005) noted that, despite a mitigate the effects of information overload, but they proliferation of sources of information, getting access did not discuss how decisions about the information to information to enable evidence-based decision technology were made. They mentioned various making in health care decisions was difficult.(Clancy sources of information utilized by decision makers, & Cronin, 2005) One can envision the same friends and family, professionals in the field, personal difficulty in operations, or sales, or finance. Sources experience (in the buying a house example, they of unbiased information are rare, and it is difficult to mentioned touring the house), but they did not know where to turn. The problem, however, is include the number or types of sources of information especially acute in the information technology field in their research. (Yu & Chiang, 2002) due to the magnitude of the impact of a wrong decision along with the lack of standards and general While it was relatively easy to find studies on the use level of "hype" in the information technology field. of information technology within the decision making process, what seems missing from academic This study, therefore, attempts to apply scholarly publications is research on where decision makers go rigor to a topic that seems to generate an easily for information on information technology, although bought and sold opinion from many, but seems to there is a proliferation of this type of research in have little published specifically on this topic: Where industry magazines. This is also one of the research do decision makers go to obtain knowledge about
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information technology? Is there a relationship inflation factor is less than 10 for all variables. Data between their sources of knowledge and whether or was also screened for outliers using Mahalanobis not they utilize technology effectively? Distance analysis, and 10 outliers were eliminated 2 (χ = 67.66 with 34 degrees of freedom). A chi- RESEARCH METHODOLOGY square analysis was done on each of the questions Data was gathered over a two year period. The from each of the years to assess whether or not there questionnaires were mailed to the top decision maker was a significant difference between the responses in all businesses listed as members of the local based on which year the survey was completed and Chamber of Commerce, and all the businesses listed no difference was found. After eliminating in the database of the local newspaper. The results duplicates and outliers, the cases were combined for a could be faxed back, although the address was total of 555 responses. included if the respondent wished to send the response in the mail. The response rate was 10% the Effective Use of Technology first year, and 7% the second year (reflecting a different and larger sample population than the first Effective use of information technology is difficult to year). operationalize. Any self-assessment of technology effectiveness would introduce bias into the answer. Data Preparation Building upon an earlier study, (Rhoads, 2005) effective use of information technology was defined There were 584 responses received. The responding utilizing a number of component responses from the organizations were compared to national averages questionnaire. based upon company size, number of employees, and types of industries. No significant differences were Figure 2. Information Technology Related found. It was therefore determined that the sample Questions Used in Effectiveness of Use Assessment adequately represented a typical population of business organizations. The breakdown of industries Email: What percentage of your employees have a business Internet email address can be found in Figure 1. 1. 1 - 5% 2. 6-25% Figure 1. Type of Industry Breakdown 3. 26-50% 4. 51-75% # in 5. 76 - 100%
Type of Industry Sample Web: Do you currently have one or more Education 19 domain name(s) registered in your companies' name and only used by your company? Healthcare 29 1. Yes Manufacturer 80 2. No
Media & Publication 6 Ecommerce: During the next 12 months, do you Non Profit 53 plan to implement transaction processing (e- commerce) on your web site? Retail 51 1. Yes Service 333 2. No 3. Already doing unknown 13 WebDevel: To whom do you turn for web site Nineteen responses were eliminated (3.3%) due to development? duplication. Missing data was filled in utilizing the 1. Local developer 2. Non-local developer mean, and accounted for less than .5% of the 3. In house developer responses. 4. No web page
The data was screened for multicolinearity, and was found to fulfill orthogonality assumptions. Tolerance is greater than .1 for all variables, and variance
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Connection: What kind of connection to the H1: Decision makers who seek and trust knowledge Internet do you have at your company? from Top Consulting Firms will not use 1. Dialup 2. T-1 (full, fractional,framerelay) information technology more or less effectively 3. DSL than those who didn't. 4. Cable (i.e. - Comcast) 5. Wireless (Satellite) H2: Decision makers who seek and trust knowledge 6. None from Friends & Family will not use information technology more or less effectively than those InfilteredSpam: If you receive unfiltered email, what percentage do you consider to be who didn't. spam? (spam is unwanted bulk email) 1. 1 - 5% H3: Decision makers who seek and trust knowledge 2. 6-25% from Publications & Web will not use 3. 26-50% information technology more or less effectively 4. 51-75% than those who didn't. 5. 76 - 100% H4: Decision makers who seek and trust knowledge FilteredSpam: If you receive email already filtered for spam, what percentage of spam from Vendors will not use information do you still get? technology more or less effectively than those 1. 1 - 5% who didn't. 2. 6-25% 3. 26-50% H5: Decision makers who seek and trust knowledge 4. 51-75% from Local Consulting Firm will not use 5. 76 - 100% information technology more or less effectively than those who didn't. Based on the answers, an organization is Furthermore, it may be that rather than the actual characterized as ―Savvy, Blossoming, Base, or source of information, there might be a relationship Unversed‖ in the effectiveness of their use of between the number of sources of information and information technology. The rules utilized to effective technology use. It might be posited, for characterize an organization are listed in Figure 3 in example, that decision makers who use more sources the Appendix. of knowledge might use information technology more effectively than a decision maker who uses The dependent variable, Effective Use of Information fewer sources of knowledge. On the other hand, it Technology, therefore, is not a self assessment of may be that information overload takes place with effective use, but an independently derived variable too many sources of knowledge, and decision makers based upon quantitative responses. The results of this who use fewer sources of knowledge will be the more variable did not differ significantly from the effective information technology users.. The null judgment of the researchers based upon personal hypothesis in this case would be: experience with 23 of the organizations. H6: Decision makers who seek and trust information The question is whether or not there is a relationship from a variety of sources will not use between this variable (effective technology use) and information technology more or less effectively than those who only used one source. either the number or sources or the type of sources of knowledge used by the decision maker about All hypothesis were subject to two tailed tests of information technology. The decision maker was significance. A chi-square analysis was conducted for asked which were trusted sources of information, or each hypothesis. how they kept up to date with technology. The RESULTS choices were (more than one could be chosen): Top Consulting Firm (Gartner, Giga, Meta, Forrest, Descriptive Results other); Friends & Family; Publications & Web; One of the interesting results surrounding who within Vendors (Microsoft, Oracle, CompUSA, Staples, the company made the information technology Dell, Gateway, etc.); or Local Consulting Firm. decisions. This aspect was more fully investigated in Each one gives rise to a null hypothesis: another research paper (Rhoads, 2005), but the
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descriptive statistics regarding which roles were part of trusted sources of knowledge about information of the decision making team is included here for technology. informational purposes. In over fifty percent of the cases, the owner, President, or CEO made the Figure 6. Response Count for Sources of Knowledge technology decisions, perhaps leading us to the conclusion that decision makers on technology Sought and Trusted Sources of Knowledge 600 decisions cannot be said to always have a technology 500 background. The person in the technology- experienced role was involved in the decision only 400 19% of the time. In only 20 organizations were both 300 the CEO/President/Owner and the CIO/IT 200
Director/IT manager involved in technology 100 Number of Decision Makers Decision Numberof decisions. This lends additional importance to the 0 Top Friends and Publications Local Vendors sources of knowledge for the decision. The Consulting Family & Web Consulting percentage of all answers is shown in Figure 4 and No 534 488 452 416 330 the number of organizations including each role in Yes 21 67 103 139 225 the decision making team for technology is shown in Clearly the most common trusted source of Figure 5. knowledge are local consultants, with almost half of Figure 4. Decision making Percentage the decision makers including Local Consulting among the most trusted sources of information. Surprisingly, vendors are the second most listed, 9% while publications and the web coming in third. Not 51% surprisingly, few companies paid for the top consulting firms. 19% The question, of course, is whether or not the source CEO/President/Owner CFO/Controller/Finance VP of knowledge is related to whether or not the COO/Operations/Manager organization has been classified as Savvy, 5% 6% Individual Dept Mgrs CIO/IT Director/ IT Manager* Blossoming, Base, or Unversed in the effectiveness Other:______of their use of Information Technology. 10% Inferential Results Figure 5. Number of Organizations Including Role The results show that decision makers who listed in Decision Making Team (Not mutually exclusive) Local Consulting Firms as their trusted source of
400 knowledge about information technology were 350 significantly (chi-square = 16.9, p = .001, df = 3) 300 250 different in a two tailed test. Review of the data 200 150 shows that more organizations were classified as 100 Savvy in the effectiveness of their use of information 50 0 technology. Publications and Web also showed as significantly different (chi-square = 12.7, p = .005, df
Other:______= 3), with a higher-than-expected number of Savvy
Individual Dept Mgrs CEO/President/Owner COO/Operations/Manager and Blossoming among decision makers who sought CFO/Controller/Finance VP CIO/IT Director/ IT Manager* information from either publications or the web. The graph and table in Figure 6 shows how many respondents included each of the choices in their list
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Decision makers who sought and trusted the advice groups classified as Savvy, and a lower than expected of family and friends were also significantly different count (6 instead of 9) in the Yes column for the group (chi-square = 13.3, p = .004, df = 3), but the results classified as Unversed in the effectiveness of their showed the exact opposite effect. Decision makers information technology use. This can be seen in who relied upon family and friends were more likely Figure 8. to be classified as Base or Unversed, and much less likely to be in the Savvy or Blossoming group. In all Figure 8. Local Consulting Firm By IT Use Effectiveness Crosstab three of these cases, the null hypothesis was rejected.
No Yes Total Neither Top Consulting Firms, nor Vendors showed a statistical difference, indicating that decision makers Savvy Count 49 60 109 who relied upon vendors or paid top consulting firms were not likely to be classified as either more or less Expected 64.8 44.2 109 effective in their information technology use. The Blossoming Count 28 8 36 null hypothesis was accepted in this case. Expected 21.4 14.6 36 All the results of the chi-square analysis for each Base Count 236 151 387 source are shown in Figure 7. Expected 230.1 156.9 387 Figure 7. Summary of chi-square results Unversed Count 17 6 23 Source of Knowledge Pearson Significance # Chi- (p) cells square with Expected 13.7 9.3 23 <5 Top Consulting Firms 6.2 .102 3 Friends and Family 13.27 .004 2 Figure 9 shows the contingency table for the 12.731 .005 1 Publications & Web Publications and Web group - with a higher than Vendors 2.076 .557 0 expected count in Savvy and Blossoming, and a Local Consulting Firms 16.891 .001 0 *N = 555 and df = 3 for all tests lower than expected count in Base and Unversed.
The last hypothesis, the number of sources identified Figure 9. Publications & Web By IT Use by the decision maker, was also accepted. How Effectiveness Crosstab many sources of information the decision maker utilized did not impact the effectiveness of their use No Yes of information technology. Furthermore, the frequency chart clearly shows that the majority (494 Savvy Count 85 24 out of 555, or 89%) of the organizations trusted only one source of knowledge. Due to this fact, 8 cells Expected 88.8 20.2 (50%) have an expected count less than 5, which Blossoming Count 22 14 would have forced us to question the results even if it had been significant, since a high number of small Expected 29.3 6.7 values tends to inflate the chi-square and constitutes a Base Count 326 61 too-liberal test of significance. Expected 315.2 71.8 The 2 X 2 contingency tables of the chi-square Unversed Count analysis clearly indicate which direction the 19 4 difference occurred. The table for the Local Expected 18.7 4.3 Consulting Firm source shows a higher than expected count (60 instead of 44) for the Yes column for
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In Figure 10, the Friends and Family contingency For the Top Consulting Firms, shown in Figure 12, table shows a higher count than expected in the Yes the counts and the expected counts for each group of column for both Base and Unversed, while showing a technology use are also fairly close. lower than expected count for Savvy and Blossoming. Figure 12. Top Consulting Firm By IT Use Effectiveness Crosstab Figure 10. Friends and Family By IT No Yes Use Effectiveness Crosstab
Savvy Count 108 1 No Yes Expected 104.9 4.1 Savvy Count 105 4 Blossoming Count 36 0 Expected 95.8 13.2 Expected 34.6 1.4 Blossoming Count 33 3 Base Count 369 18 Expected 31.7 4.3 Expected 372.4 14.6 Base Count 333 54 Unversed Count 21 2 Expected 340.3 46.7 Expected 22.1 .9 Unversed Count 17 6
Expected 20.2 2.8 In Figure 13 in the Appendix we can see that eight of the cells had values of less than five. The next two contingency tables show a fairly close to expected count. Figure 11 shows the results for DISCUSSION using Vendors as a trusted knowledge source. Our findings display solid empirical evidence that Figure 11.Vendors By IT decision makers who effectively use information Use Effectiveness Crosstab technology more often seek the advice of local consultants as well as doing their own reading of web No Yes and print publications. This is not surprising unless taken in the context of the lack of support for seeking Savvy Count 83 26 the advice for top consultants and vendors Expected 81.7 27.3 information. There is obviously a qualitative difference in the usefulness of these three different Blossoming Count 27 9 sources of knowledge. Expected 27.0 9.0 Nor is it surprising that decision makers who trust Base Count 286 101 friends and family tend to do less well in effectively utilizing information technology. Friends and family Expected 290.1 96.9 are the "easy" route to obtain knowledge, and Unversed Count 20 3 chances that the friends or family happen to have the specific information technology knowledge needed Expected 17.2 5.8 by the decision maker are remote. The lack of support for Top Consultants having an impact on effective IT use may be a factor of the low incidence for seeking this source. After all, top consultants are very expensive, and our sample matches the typical
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population of businesses, 85% of which are on the is something qualitatively different about these two smaller side. However - one would think that even sources of knowledge. among the non-significant findings there would be a higher than expected count to Top Consultants Another limitation could be the localization of the among the Blossoming and Savvy, and that does not sample. Even though our sample seemed seem to be the case. representative in terms of size and industry of the nation's business as a whole, these businesses were It also does not appear that effective IT use has any all from one geographic location, a region of about relationship with seeking or trusting information 100 square miles in southeastern Pennsylvania just from Vendors, and this source does not suffer from northwest of Philadelphia. There may be some low incidence. It would appear that obtaining IT unseen geographic or cultural element that would knowledge from vendors does not help in becoming a limit the generalizability of our findings. more effective IT user. Secondly, the operationalized definition of Effective Seeking additional sources of knowledge also does Information Technology Use has not been heavily not seem to impact IT effectiveness. It may be, validated beyond the judgment and experience of the especially among the organizations who utilize researcher's personal knowledge of a small sample of technology more effectively, that a single source of the companies. The variable was not defined prior to knowledge, if trusted, is good enough. the study - but rather indirectly established using existing questions and responses. Although we feel LIMITATIONS this method is superior to more subjective assessments of the decision makers being surveyed, it Before itemizing our conclusions and implications of may limit our ability to infer more broadly based our results, it should be noted that there are several conclusions. limitations to this study. Lastly, although multiple sources of knowledge were What we cannot establish with this research design is possible and encouraged in the instructions, whether the surveyed decision makers utilize respondents may have interpreted the question to be technology more effectively because they seek out looking for one primary source. This limits the and trust local consultants as sources of knowledge, usefulness of the sixth hypothesis, and may be the or if they seek out and trust local consultants as their reason for the large number of decision makers who source of knowledge because they utilize technology only reported one source of trusted knowledge. more effectively. Similarly, we cannot say that reading print and web publications about information CONCLUSIONS AND IMPLICATIONS technology cause more effective use of information technology. Both of these findings could be There are several implications for researchers based explained by a third variable for which we have not upon this study. The relatively high chi-square value controlled. One example might be simply good of the impact of using local consultants as a trusted leadership or decision making skills. It would make source (Pearson chi-square 16.89, p = .001) provides intuitive sense that good decision makers spend time strong empirical evidence that seeking the advice of and energy seeking out information on topics before local consultants makes a difference. The fact that making decisions, and therefore become more there is an impact on effective IT use when decision effective at utilizing that knowledge. Not so makers use print and web sources of knowledge is successful decision makers don't tend to expend the also an important finding. Both directions would effort, and therefore would not be as effective at benefit by more specific research. As noted in the utilizing the knowledge. The fact that not all sources limitations, our research cannot adequately determine of knowledge were found to have a significant whether effective IT users use local consultants or if impact, however, leads credence to the idea that there local consultant cause more effective IT use. This
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finding may spur future research of many questions. Seeking advice from top consultants and vendors had Which is the cause and which is the effect? What no impact on effective IT use. characteristics of decision makers led them to these sources of knowledge? What type of help did the REFERENCES local consultants provide which impacted the Benamati, J., & Lederer, A. L. (2001). Coping with effectiveness of IT use the most? The same questions rapid changes in it. Communications of the ACM, could be asked of web and print resources. 44(8), 83-87.
It would also be useful to reproduce the results of this Bergman, E. M., & Feser, E. J. (2001). Innovation survey among a more geographically disbursed system effects on technological adoption in a regional sample of businesses. Further validation of the value chain. European Planning Studies, 9(5), 629- effective information technology use variable would 648. also be helpful. Finally, observation of a number of actual decision makers in the midst of the decision Black, S. E., & Lynch, L. M. (2001). How to making process would provide more direct insight compete: The impact of workplace practices and into the number and type of sources used, which may information technology on productivity. Review of correlate with effective use of information Economics & Statistics, 83(3), 434-445. technology. Brynjolfsson, E., Hitt, L. M., & Yang, S. (2002). Perhaps the most important aspect of this research, Intangible assets:how the interaction of computers however, is the practical implications. Pending and organizational structure affects stock market future contradictory studies, it would not seem to be a valuations. Brookings Papers on Economic Activity, good idea to invest in expensive top consultants. 1, p. 137. Local consultants seem to do a measurably better job. Bucatinsky, J. (1996). Technology in small This research would imply that decision makers businesses. CPA Journal, 66(11), 36. should do their own readings of print and web information about the IT they are considering using. Burkey, J., & Kuechler, W. L. (2003). Web-based surveys for corporate information gathering: A bias- Even more specifically, asking friends and family for reducing design framework. IEEE Transactions on advise would seem to be contraindicated. Doing so Professional Communication, 46(2), 81. may lead the decision maker astray, leading to less effective IT use within their organizations. Clancy, C. M., & Cronin, K. (2005). Evidence-based decision making: Global evidence, local decisions. Further implications from this research is that once a Health affairs, 24(1), 151-162. decision maker has a trusted source, they don't necessarily need to find many other confirmations of Dedrick, J., Gurbaxani, V., & Kraemer, K. L. (2003). that source. It doesn't appear to be necessary to Information technology and economic performance: obtain further knowledge from the vendor or from the A critical review of the empirical evidence. ACM top consultants. Computing Surveys, 35(1), 1-28.
In conclusion, it does appear to make a difference Dehning, B., & Richardson, V. J. (2002). Returns on which sources of knowledge are used by decision investments in information technology: A research makers regarding information technology. Local synthesis. Journal of Information Systems,16(1) , 7- consultants as well as print and web sources of 30. knowledge seem to have the best impact on utilizing information technology effectively within the Frank Bannister; Dan Remenyi. (2000). Acts of faith: organization. Friends and family impact effective IT Instinct, value, and IT investment decisions. Journal use negatively, and should probably be avoided. of Information Technology, 15(3), 231-241.
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Lucas, H. C. (1999). Information technology and the Rhoads, C. (2005). Impact of decisionmaker on use productivity paradox : Assessing the value of and perceived value of internet technologies investing in IT. New York: Oxford University Press. .Conference Proceedings of APUBEF, State College, PA 28(1) 151--159. O'Donnell, E. and David, J. S. (2000). How information systems influence user decisions: A Schrage, M. (1997). The Real Problem with research framework and literature review. Computers. Harvard Business Review, 75(9) 178- International Journal of Accounting Information 188. Systems, 1(3), 178--203. Strassmann , Paul A. (1999). Information Paul, S., Haseman, W. D., & Ramamurthy, K. productivity: Assessing information management (2004). Collective memory support and cognitive- costs of US corporations. New Canaan, CT: The conflict group decision-making: An experimental Information Economics Press. investigation. Decision Support Systems, 36(3), 261. Tallon, P. P., Kraemer, K. L., & Gurbaxani, V. Plotnick, N. (2000). The IT professional's guide to (2000). Executives' perceptions of the business value managing systems, vendors & end users. Berkeley, of information technology: A process-oriented Calif: Osborne/McGraw-Hill. approach.16(4), 145-173.
Poston, R., & Grabski, S. (2000). The impact of Thorp, J. (2003). The information paradox : enterprise resource planning systems on firm Realizing the business benefits of information performance. 21st Proceedings of International technology (Rev. ed.). Toronto, ON: McGraw-Hill Conference on Information Systems, Las Vegas. 479- Ryerson. -493. Willcocks, L., & Lester, S. (1999). Beyond the IT Remenyi, D., Money, A. H., & Sherwood-Smith, M. productivity paradox. New York: Wiley. (2000). The effective measurement and management of IT costs and benefits (2nd / Dan Remenyi, Arthur Yu, P. L., & Chiang, C. I. (2002). Decision making, Money, Michael Sherwood-Smith with Zahir Irani habitual domains and information technology. ed.). Oxford ; Boston: Butterworth-Heinemann. International Journal of Information Technology & Decision Making, 1(1), 5.
Dr. CJ Rhoads is an Associate Professor in the College of Business at Kutztown University. She is the author of several books, including co-author of the best selling Microsoft Office 2007 In Business (Pearson/Prentice Hall). Her most recent book is Entrepreneur's Guide to Managing Information Technology (Praeger/Greenwood). Her research interests are leadership, decision making, strategy, information technology and performance measures.
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APPENXICIES Figure 3. Rules for Use of Technology Index Score
Effectiveness of Technology Description Operational Definition Use Category
Savvy Utilizes technology well. Pays attention to both Email >=4, Web = 1, Ecommerce <>2, end user and infrastructure needs. Not WebDevel <> 4, Connection afraid to try new technologies, but not on the bleeding edge either. <>1 or 5, Unfilteredspam > 0 or FilteredSpam > 0
Blossoming Pays attention to technology - both end user and infrastructure needs. Email >2, Web = 1, Ecommerce =1, Just learning about it - doesn't WebDevel <> 4, Connection jump in, but doesn't shy away <>5, Unfilteredspam > 0 or either. FilteredSpam > 0
Base Uses technology when necessary, but Email <4 and >1, Web = 1, Ecommerce doesn't always pay attention to =1, WebDevel <> 4, both infrastructure and end user Connection <>2, needs. Resists new Unfilteredspam > 0 or technologies. FilteredSpam > 0
Unversed Does not generally use information Email <=1, Web = 2, Ecommerce 2, technology in business planning WebDevel = 4, Connection = 1 and operation beyond the bare or 5, Unfilteredspam = 0 or minimum. FilteredSpam = 1
Figure 13. Number of Sources By IT Use Effectiveness Crosstab
Few Some Many No Sources Sources Sources Sources Total
Savvy Count 3 98 7 1 109
Expected Count 6.3 97.0 5.1 .6 109
Blossoming Count 5 28 3 0 36
Expected Count 2.1 32.0 1.7 .2 36
Base Count 22 347 16 2 387
Expected Count 22.3 344.5 18.1 2.1 387
Unversed Count 2 21 0 0 23
Expected Count 1.3 20.5 1.1 .1 23
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CORPORATE DISINFORMATION & BUSINESS SOCIAL RESPONSIBILITY: THE CASE OF CLIMATE CHANGE DENIAL Bruce Lindsley Rockwood, Bloomsburg University of Pennsylvania
ABSTRACT
Do corporate issue advertising, public relations campaigns, and the funding of supposedly ―independent‖ think tanks and ―public interest‖ front groups create a false sense of uncertainty in matters of important public interest? Do they go too far, or are they a legitimate means of profit maximization? Starting with the example of the fifty year campaign of the tobacco companies to misrepresent the addictive and cancer causing nature of tobacco, this paper looks at the tactics of Exxon Mobil, the Western Fuels Association and others to fund and disseminate ―doubt‖ about the science and risks associated with global warming and climate change. Through the lens of the Supreme Court‘s approach to commercial speech (Virginia Board of Pharmacy) and corporate political speech (First National Bank of Boston v. Bellotti) the paper examines how changes in the law have enabled corporations with deep pockets and tax deductions for their public relations expenditures to so distort the ―marketplace of ideas‖ that there is little room for democratic deliberation based on the merits of proposed policy options and objective science. The paper takes into account James Boyd White‘s critique of the Court‘s commercial speech doctrine, and recommends a turn towards a more responsible, humane approach to corporate participation in public policy discourse.
INTRODUCTION is striking because of what it leaves out. Why, for instance, assert the corporation‘s status as a person Corporations are artificial persons, having only those rather than as property? Certainly, the corporation‘s powers expressly granted to them under our susceptibility to ownership would have allowed a Constitution and laws, or those implied powers contrary assertion.‖ (Nesteruk, 1999) which, as Chief Justice John Marshall ruled, are necessary to their very existence: Dartmouth College The consequences of selective application of various v. Woodward, 4 Wheat. 518, 636 (1819). The word Constitutional provisions to corporate entities have ―corporation‖ appears nowhere in the Constitution or unfolded in various ways over the course of our legal its amendments. If, as some Supreme Court decisions and political history, although not without assert, corporations have any constitutional ―rights‖ controversy. See, for example, the call to abolish at all, apart from the rights of their individual creators corporate personhood by the grassroots organization and owners, those rights are purely a result of judicial Reclaim Democracy (http://reclaimdemocracy.org/). legislation, most of it lacking in any plausible justification. This is well illustrated in the case of Substantive due process used to strike down Santa Clara Co. v. Southern Pacific Railroad, 118 economic regulation under the doctrine of Lochner v. U.S. 394 (1886), where Chief Justice Waite noted New York, 198 U.S. 45 (1905) was discredited during ―The Court does not wish to hear argument . . . the New Deal, but may see a revival with the whether the provision in the Fourteenth Amendment . increasing influence of Federalist Society lawyers . . which forbids a State to deny to any person . . . the appointed to the bench by President George W. Bush, equal protection of the laws, applies to these particularly Chief Justice Roberts and Justice Alito. corporations. We are all of the opinion that it does.‖ The Supreme Court early on ruled that the Fifth (396) Amendment privilege against self-incrimination did not apply to corporations, Hale v. Henkel, 201 U.S. Jeffrey Nesteruk comments on this holding: ―Such a 43 (1906) at 74, and U.S. v. White, 322 U.S. 694 bald assertion of the corporation‘s status as a person (1944). In a recent book, however, libertarian scholar
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John Hasnas has argued that this ruling has resulted 425 U.S. 748, 96 S. Ct. 1817 (1976), Justice in unfair treatment of corporations and professional Blackmun emphasized the consumer‘s interest in partnerships when taken together with the U.S. truthful information about prices rather than the Sentencing Commission‘s sentencing guidelines. corporation or business‘s interest in talking about its Hasnas cites the Department of Justice‘s Thompson commercial activities. Indeed, White points out that (and now McNulty) Memoranda guiding Department many professional pharmacists might have preferred of Justice evaluations of the degree of completeness the existing economic regulations which precluded of corporate cooperation when under investigation price advertising, while the Court‘s decision in effect (Hasnas, 2006). Corporations have been held to have compels them to engage in a kind of speech whose the attorney-client privilege available for the benefits were at least debatable. White argues that communications of all their employees with counsel given the normal deference of the Court to economic made in contemplation of litigation since the regulations adopted by the legislature, Blackmun felt unanimous decision in Upjohn v. U.S., 449 U.S. 383 compelled to base his decision on First Amendment (1981), but these DOJ guidelines include carrot and grounds that were at best formal and ill considered, stick efforts by the DOJ to encourage ―voluntary‖ concluding ―It is hard to regard Blackmun as actually waivers of the privilege to avoid indictment of the meaning what he says about the First Amendment firm. here.‖ (White, 2006, at 80-83)
The application of the First Amendment to corporate In 1978, the U.S. Supreme Court took the law one speech has evolved in much the same way over the step further, and decided the case of First National past century, with stops and starts as circumstances Bank of Boston v. Bellotti, 435 U.S. 765, 98 S. Ct. and prevailing judicial ideology dictated. As James 1407 (No. 76-1176) by a vote of 5 to 4, holding for Boyd White notes in introducing his discussion of the first time that corporate persons had the same Virginia Board of Pharmacy: ―free speech‖ rights in the political sphere that flesh and blood individuals hold under the Constitution‘s ―The crucial question for the Court, then, First Amendment. Building on its expansion of is the bearing, if any, of the First corporate speech rights in Virginia Board of Amendment upon the case, on the grounds Pharmacy, the Court plausibly argued that speech that the conduct regulated here takes the rights ought not to depend upon the identity of the form of ‗speech.‘ . . . [T]his speech is speaker. Presciently, however, then Justice William commercial in character, simply a way of Rehnquist noted in dissent that there could be doing business. While there are many problems for society with this result: proposed rationales for the First Amendment, most of them conceive of it ―Although the Court has never explicitly as protecting political speech, or the recognized a corporation‘s right of discovery of socially valuable truth, or the commercial speech, such a right might be autonomy and dignity of the speaker, not considered necessarily incidental to the purely economic processes. Not business of a commercial corporation. . . . surprisingly, when first presented with the It does not necessarily follow that such a question decades ago, the Court held that corporation would be entitled to all the commercial speech was simply beyond the rights of free expression enjoyed by protection of the First Amendment.‖ natural persons. Although a newspaper (White, 2006 at 78) corporation must necessarily have the liberty to endorse a political candidate in Giving an expansive reading of the commercial its editorial columns, it need have no speech rights of corporations in Virginia Board of greater right than any other corporation to Pharmacy v. Virginia Citizens Consumer Council, contribute money to that candidate‘s
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campaign. Such a right is no more society as a whole. A primary example is the fifty ‗incidental to its very existence‘ that it is year campaign of the tobacco industry to conceal the to any other business corporation. harmful effects of their product while continuing to manipulate its content for nicotine (for its addictive It cannot be so readily concluded that the qualities) while marketing it to minors, women and right of political expression is equally minorities and while reassuring consumers generally necessary to carry out the functions of a that their health related fears were misplaced. corporation organized for commercial purposes. . . . A State grants to a business While there are some in the law and economics corporation the blessings of potentially movement (Viscusi, 2002) who argue that the public perpetual life and limited liability to overestimates the risks and costs of smoking to the enhance its efficiency as an economic states, there is no question that the stories of many entity. It might reasonably be concluded lives ruined by smoking cannot be accurately reduced that those properties, so beneficial in the to a number in a cost-benefit analysis spread sheet. economic sphere, pose special dangers in But for suppression of information and the complicity the political sphere. Furthermore, it might of tobacco lawyers in the misuse of their attorney- be argued that liberties of political client privilege (Hazard, 1998), many lives would expression are not at all necessary to have been saved and many of these losses avoided. effectuate the purposes for which States Corporate free speech, commercial or political, has permit commercial corporations to exist. imposed considerable costs on our society and now, So long as the Judicial Branches of the with reduced U.S. smoking, is helping to further State and Federal Governments remain spread the plague overseas. 1 (Rabin & Sugarman, open to protect the corporation's interest in 1993 & 2001; Kluger, 1997; Glantz & Balbach, its property, it has no need, though it may 2000; Slovic, 2001; Kessler,2001; Pertschuk, 2001; have the desire, to petition the political Schapiro,2002; Viscusi, 2002; Curriden, 2007; ―An branches for similar protection. Indeed, Evil Weed,‖ Economist, 2007). the States might reasonably fear that the corporation would use its economic power Shortly after Bellotti was decided, Mobil (now part of to obtain further benefits beyond those ExxonMobil) began regular issue-advertising on already bestowed. . . . I would think that matters of national energy policy in an effort to any particular form of organization upon counteract pressures for ―soft energy‖ alternatives to which the State confers special privileges reliance on oil and other fossil fuels during the Carter or immunities different from those of Administration such as solar, wind power, natural persons would be subject to like geothermal, conservation, and other strategies that regulation, whether the organization is a are being revisited now in response to the climate labor union, a partnership, a trade
association, or a corporation.‖ (825-827) 1 The World Health Organization‘s Framework CORPORATE SPEECH ABUSES Convention on Tobacco Control may help reduce the adverse impact of increased tobacco marketing and When Justice Rehnquist wrote his dissent in Bellotti, consumption internationally. Corporate it was already apparent that corporations were Accountability International (formerly INFACT) has prepared to abuse their existing financial and done excellent work in this field, and has A/V strategic planning powers, including their powers of materials available on the story: Making a Killing; and Overcoming the Odds: A Story of the World’s communication, to insulate their actions and their First Global Health & Corporate Accountability assets from the financial consequences of the Treaty, both available at: externalities their profit seeking activities imposed on http://www.stopcorporateabuse.org/cms/
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crisis (Lovins, 1977; Kolbert, 2007).2 These included viewpoints are widely expressed, how can public video clips formatted to look like news items which policy be rationally determined in a democracy? were distributed free to local television stations (I Professor White articulates this concern clearly: have a set they kindly sent me at the time). ―[T]here is a deep opposition between advertising --- the world it creates, the assumptions on which it At about the same time, national trade groups and works, the activities of mind and imagination and industry spokesmen used their ―free speech rights‖ to feeling that it stimulates --- and what I call living advocate for reduced government supervision of their speech: speech that rewards attention and affirms the activities, leading to the rise of deregulation in the value of the individual mind and experience‖ (White, Reagan years and the subsequent collapse of the 2006, at 84). Savings & Loan Industry as a result of inadequate supervision (Rockwood, 1989). This was followed Each of these and many other possible examples more recently by a move to privatize many basic would require many books and a separate course or government functions, including prisons and even the conference to fully address all their implications. But military, as we see in the current scandal over the use in each case the power of corporate speech ensured of Blackwater contractors in Iraq (Klein, 2007b). that one simplistic, skeptical and self-interested Opponents of wholesale deregulation and viewpoint was dominant: fully and regularly privatization of course had the same First presented to the public without much criticism or Amendment rights in principle, but in practice analysis, whether in the print or telecommunications corporate funding, both directly in issue advertising media, and usually without the public being aware of and lobbying, and indirectly through the funding of who was funding that viewpoint (Moyers, 1999). The conservative think tanks and advocacy front groups, rise of the Internet as a means of providing overwhelmed public debate. (Brock, 2005; Kaplan, alternative views since the 1990s has created new 2004; Mooney, 2005; Rich, 2005; Rogers & means of counter-acting these trends, but also led to Harwood, 1995) increased polarization of views and confusion as to the reliability of information presented on web sites The imbalance in the claimed ―free marketplace of whose provenance is often difficult to ascertain. ideas‖ was clear in the assault on the Clinton Health (Sunstein, 2001) And the FCC appears ready to lift care proposals in 1992-1994, as documented by the restrictions on the combined ownership of work of Bill Moyers in cooperation with the newspapers and television stations in the same 3 Annenberg Center (Moyers, 1994). If only certain community, further contributing to the corporate dominance of the mass media most people rely upon. (Labaton, 2007) 2 Amory Lovins continues to be an important thinker, author and consultant on energy strategy, The most significant continuing example of the abuse from his base at the Rocky Mountain Institute in of corporate speech rights and budgets since the Colorado. His on line lecture ―Imagine a World‖ tobacco case is that of disinformation in the matter of th from the 25 anniversary of RMI is well worth global warming (Rockwood, 2006 & 2007). There watching at their web site: http://www.rmi.org/ has been a long-term, widespread use of corporate 3 Bill Moyers. (1994, October 7). Ads and Health funds to promote confusion and doubt in the face of Care. PBS.Org. The VHS is not available on the web the scientific consensus on global warming site of PBS or the Annenberg Public Policy Center, (McKibben, 2005; Mooney, 2005; Gelbspan, 1995, but I own a copy. The PDF for a subsequent report 1998, 2001, 2004; Flannery, 2005), a strategy that on issue advertising by the Center is available on line at their cite: Deborah Beck, Paul Taylor, Jeffrey only recently has received serious attention in the Stranger and Douglas Rivlin, Issue Advocacy corporate-owned mass media. (Begley, 2007). The Advertising During the 1996 Campaign, Annenberg Union of Concerned Scientists (USC, 2007) report Public Policy Center, University of Pennsylvania, that between 1998 and 2005 Exxon Mobil provided Philadelphia, Pa (1997).
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over $16 million dollars to 43 front groups to fund serious action by the United States (Kolbert, 2006). climate science skeptics. The summary of the report on their web site notes that Exxon Mobil‘s tactics: As an example of the White House‘s intentional denial of the reality of anthropogenic climate change, raised doubts about even the most take Thomas Friedman‘s comments earlier this year: indisputable scientific evidence funded an array of front organizations to Sometimes you read something about this create the appearance of a broad platform administration that is just so shameful that for a tight-knit group of vocal climate it takes your breath away. For me, that was change contrarians who misrepresent peer- the March 20 article in this paper detailing reviewed scientific findings how a House committee had just released attempted to portray its opposition to action documents showing ‗hundreds of instances as a positive quest for "sound science" rather than business self-interest in which a White House official who was used its access to the Bush administration to previously an oil industry lobbyist edited block federal policies and shape government government climate reports to play up communications on global warming uncertainty of a human role in global warming or play down evidence of such a Despite this exposure, Fox News continues to role.‘ The official, Philip A. Cooney, left provide skeptical coverage of climate change issues, government in 2005, after his shenanigans but CNN‘s fall, 2007 series of reports ―Planet in were exposed . . . and was immediately Peril‖ provides a positive counter-example. hired by, of course Exxon Mobil. Before The fact that the mass media is actually beginning to joining the White House, he was the take climate change seriously is due in part to the ‗climate team leader‘ for the American overwhelming scientific evidence supporting it, well Petroleum Institute, the main oil industry documented in the peer reviewed literature (Oreskes, lobby arm.‖ (Friedman, T, 2007) 2004a & b, 2006, 2007), and to the work of the UN In conjunction with its conservative base in the Intergovernmental Panel on Climate Change (IPCC) media, and remaining corporate deniers, the Bush in articulating that consensus. Al Gore‘s film and administration continues to downplay the seriousness book, ―An Inconvenient Truth,‖ brought the broader of the situation and to promote its own alternatives, public into the conversation (Gore, 2006), and both which fall far short of what is necessary to meet the Gore and the IPCC were recognized with the Nobel crisis, refusing ―to embrace mandatory measures‖ Peace Prize this month, much to the chagrin of called for by many other countries. (Broder, 2007) remaining climate change skeptics (Byrne & Monastersky, 2007; Gore, 2007; Gibbs, 2007). Even This persistent denial continues even though revenue the evangelical religious community, long thought to neutral carbon tax proposals and proven technologies be united in skepticism of science as a result of exist that could, with planning and investment, be debates over creation science and stem cell research, brought on line quickly to mitigate the crisis. (Pacala has recently begun to support an affirmative response & Socolow, 2004; Lovins et. al., 2000; Lovins et. al., to the challenge of anthropogenic global warming as 2006; FCNL, 2007) A good example of what part of religious stewardship. technically proven possibilities are available is the Carbon Mitigation Initiative (CMI) stabilization This scientific, ethical, and international consensus wedge game available at the Princeton University (Rockwood, 2006; Stern, 2006) means that after the CMI web site: http://www.princeton.edu/~cmi/ . The November, 2006 elections, only the White House and case for a carbon tax as a solution for creating market Executive branch of the U.S. government remains incentives to address the problem is made at the committed to continued denial of the real crisis that Carbon Tax Center, http://wwwcarbontax.org/ climate change poses, and the need for prompt and
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MILTON FRIEDMAN’S ROLE industry (Kaye, 2003). A similar story informs the climate change debate. It is conceivable that some of Why do so many conservative politicians and these few remaining ―true disbelievers‖ are firmly conservative journals like National Review, The committed to their views in the face of all evidence Weekly Standard, and the Wall Street Journal (now (Schendler, 2007), and thus willingly seize on any moving into the fold of Rupert Murdoch, whose FOX discrepancy in, or modification of, the data in the News continues to bait Al Gore and deny the continued operations of the scientific method to cast scientific consensus) feel they can get away with doubt on the overall consensus. (Samuelson, 2007; their down-playing of the seriousness of the climate Hansen, 2007) They are truly ―smoking their own change situation when many corporations are already dope.‖ beginning to take steps to respond to the challenges of climate change mitigation even without American The second reason is the continued negative impact participation in Kyoto? 4 (Fialka, 2006; Keehner, of the theory of the late Milton Friedman that the 2006; Kunreuther & Michel-Kerjan, 2006; only obligation of the corporation is to make profits Sustainable Business, 2007) for shareholders, while operating (grudgingly, it is always obvious in his analysis) ―within the law.‖ I would argue that there are two reasons for this (Friedman, M., 1970; De George, 1986 at 92-93; continued official denial and private sector Thorne, Ferrell & Ferrell, 2008, at 5 & 45) The law disinformation. One is the close political connection since Virginia Board of Pharmacy and Bellotti opens between the U.S. fossil fuel industry and their the door to widespread corporate self-interested lobbies, and the current administration, particularly influence on the shape of the law and national policy, through the highly secret activities of Vice President while Friedman‘s primary, indeed only legitimate, Richard Cheney (NYT Edit., 2005). Many in that corporate goal always was, and remains, shareholder industry continue to fund, directly and indirectly, the profit. Profit can only be measured in the short term, limited number of climate change ―deniers‖ whose since taking into account the long-term risks cutting work serves a similar function to that of the small dividends to shareholders (owners) and depressing group of scientists subsidized by the tobacco industry quarterly earnings results, while also taking into for so many years, whose main goal was to suggest account social concerns that Friedman discounts in that anything other than tobacco was the cause of the first place. These are the sort of concerns he disease, and that if tobacco were addictive, so was rejects as merely window-dressing in the interests of drinking Coke and jogging. Christopher Buckley‘s public relations and corporate self-interest. Friedman satirical novel Thank You for Smoking, made into a has no interest in stakeholder theory or the movie in 2006, reflects the audacity of the old time obligations of the corporation as a citizen (White, tobacco spokesmen, whose litigation against 1985). While Friedman has his many defenders California‘s anti-smoking commercials shows they (Summers) it is clear that his career and many are still in denial about the nature of their product and publications give ideological cover to the advocates of private self-interest as the only legitimate motivation for business. Any calls for business 4 The web site of CERES: Investors & investment in addressing the broad social and Environmentalists for Sustainable Prosperity, economic consequences of global climate change are http://www.ceres.org/ provides a wealth of thus seen by his disciples as a potential threat to short documentation about corporations currently engaged in disclosure of their carbon & other greenhouse gas term profits, which must be disputed, denied, and liability risk and the steps they are taking to mitigate ignored, using the Friedman ideology as ―moral this risk. Global re-insurance companies like Swiss cover‖ and an excuse to do nothing (Greider, 2006; Re are also promoting corporate audits and efforts at Klein, 2007a; Sachs, 2007) mitigation, as a condition of continued coverage and reasonable rates.
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For Friedman and his followers corporate investment The history of corporate disinformation in the in the future of society has no value, as they are only tobacco case, and the exposure of the similar interested in the story of money. With that mind set, campaign in the climate change case, might lead one the demands of climate change mitigation, which to doubt that the media, the public and industry itself entail expending great sums on R&D for new will ever learn not to repeat the mistakes of the past. technologies, and possibly creating wholly new Relying on objective science, and adapting to the industries that will head-off large scale disasters in lessons of evidence in the short term can avoid huge the years to come, without generating profit in the damage awards, expensive litigation, and an short term to existing companies, are simply too enormous hit on public image in the long term. An comprehensive and uncertain to entertain. Short of an ounce of prevention is worth a pound of cure, and immediate climate disaster that would dwarf even a lot more than an ounce is worth the enormous Hurricane Katrina 5 , corporations invested in the losses that recalling millions of toys with lead paint current energy mix and the Friedman mindset may can entail, or the impact that the recall of thousands see little reason to change business as usual. But of pounds of beef with salmonella can entail for a unless we abandon business as usual, the future of meat-packing firm‘s survival. business in a world with a doubling of atmospheric greenhouse gases by 2055 is bleak indeed.6 The rash One can also argue that a commitment to of fires in California in the fall of 2007 may add to intergenerational ethics, of not imposing excessive the realization that something seriously is wrong with costs on our grandchildren by avoiding more the climate, and that human influences are reasonable solutions now, ought to play a role in responsible. But the Bush Administration, while ethical corporate decision-making as well as in the rushing to provide disaster declarations for that state, public policy tools government adopts to encourage is continuing to practice censorship of government ethical corporate choices. Conservatives often make reports on climate change (Revkin, 2007), and has such an argument in calling for privatization of social yet to grant California‘s request to regular CO2 security; it certainly applies to the case for immediate emissions under the Clean Air Act, now that the response to the far more certain risks of climate Supreme Court has ruled that CO2 is subject to EPA change. regulation under the Clean Air Act. Massachusetts v. Despite these lessons of history and ethics, individual EPA (No. 05-1120) decided by the Court 5-4 on businesses, trade associations and lobbies continue to April 2, 2007. game the system, seeking to use funding of front FINAL THOUGHTS groups and legitimate charities alike to pursue their self interest while remaining under the radar. As an example, it is reported that the National Healthy Mothers, Healthy Babies Coalition announced on 5 A disaster such as the flooding of Washington, October 4, 2007 that ―women of childbearing age D.C. and cessation of the Gulf Stream might do, as should eat at least 12 ounces of seafood each week, portrayed in Kim Stanley Robinson‘s trilogy Forty including tuna and mackerel, which can have high Signs of Rain, Fifty Degrees Below, and Sixty Days and Counting. See my review of the third book, in levels of mercury.‖ It turns out that the the SFRA review #280, April-June, 2007. recommendation, which contradicts FDA and EPA recommendations in place since 2004, was based on 6 Arguably supporters of Friedman‘s theories would a study by the Maternal Nutrition Group, and that a welcome a climate crisis as yet another opportunity member of that group had got the ―National Fisheries to impose their free market ―solutions‖ on a unwilling by shell-shocked society. See: Naomi Institute to provide $1,000 honoraria to each of the Klein, The Shock Doctrine: The Rise of Disaster group‘s 14 members, with an extra $500 each to the Capitalism, and the video at her web site: group‘s four executive committee members.‖ The http://www.naomiklein.org/main
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Fisheries Institute also gave the coalition $60,000 corporate persons under the framework of our legal ―for its educational campaign.‖ 7 system objectify many issues that have the effect of denying human values and stories in the interests of The funding source here raises doubts about the ―shareholder‖ profit, and at the expense of human legitimacy of the recommendations made, even if it values and human life. It is up to us in the field of turns out that the underlying science stands up. corporate ethics and social responsibility to call Keeping the funding source quiet initially only makes attention to this, and try to change it.8 matters worse. Similar issues arise in the kinds of disclosures to be made when publishing findings on REFERENCES proposed new drugs in JAMA or The New England Journal of Medicine. Corporate funding for, and Begley, S (2007, August 13). Global warming is a influence upon, university research is another source hoax.* or so say well-funded naysayers who still of concern, particularly as public support for faculty reject the overwhelming evidence of climate change. research has declined in recent decades. Climate Inside the denial machine, Newsweek, 20-29. change deniers sometimes claim that scientists in the Brock, D (2005). The republican noise machine: peer reviewed journals are only going along with the right media and how it corrupts democracy. New consensus to get their grants funded, yet when it York, N.Y.: Three Rivers Press/Random House. comes to paying the piper and calling the tune, the Broder, J Bush outlines proposal on climate change.. role of corporate funding in getting short-term (2007, September 28). New York Times, On-line. desired policy results should be a major concern for all of us. Buber, M (1923, 2006). I and thou (Ich und du). Italy, Hesperides Press. James Boyd White argues that ―Law depends upon a belief in the reality of other people, in the possibility Byrne, R, & Monastersky, R (2007, October 12). of meaningful speech in the heightened Nobel peace prize for climate-change scientists and al circumstances it provides, and in the kind of justice gore reflects work across academe, Chronicle of that consists of real attention, honest thought, and Higher Education, retrieved Oct. 12, 2007, from: doubt. This belief is made express and manifest in http://chronicle.com/free/2007/10/354n.htm writing that calls the reader into life. It ultimately Curriden, M (2007, March). Up in smoke. ABA takes the form of love, a love of other and a love of Journal, 93, 26-32. justice.‖ (White, 2006, at 217). White‘s insight is comparable to Martin Buber‘s distinction between De George, R (1986). Business ethics, 2nd ed.. New treating people as subjects (I-Thou) rather than York, N.Y.: Macmillan. objects (I-It) in their interrelationships (Buber, 1923, The Economist, (2007, March 17). An evil weed: 2006). It is not surprising that artificial, legal tobacco (review of The Cigarette Century). The
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Fialka, J Big business joins global-warming debate. Hansen, J (2007, August 16). The real deal: usufruct (2006, March 28). Wall Street Journal, p. A4. 1. & the gorilla. Post to his mailing list available on line: http://www.columbia.edu/~jeh1/ Financial Times, Sustainable business: special report. (2007, October 12). Financial Times, p. Supplement Hasnas, J (2006). Trapped: when acting ethically is 1-10. against the law Washington, D.C.: Cato Institute. Flannery, T (2005). The weather makers: how man is Hazard, G (1998, May 18). Ethics, inc.: tobacco changing the climate and what it means for life on lawyers shame the entire profession.. National Law earth. New York, N.Y.: Atlantic Monthly Press. Journal, A22.1. Friedman, M The social responsibility of business. Kaplan, E (2004). With god on their side: how (1970, September 13). New York Times Magazine. christian fundamentalists trample science, policy and democracy in George W. Bush's white house. Friedman, T How many scientists. (2007, March 28). New York, N.Y.: The New Press. New York Times, on-line. Kaye, J (2003, September 3). Smoke & fire. Friends Committee on National Legislation, (2007, Newshour with Jim Lehrer, PBS.org. September). An earth restored. FCNL Washington Newsletter, No. 720. Keehner, J Mutual funds: options grow for green investors. (2006, June 20). Wall Street Journal, Gelbspan, R (1995, December). The heat is on: the C11.2. warming of the world's climate sparks a blaze of denial, Harper's Magazine. Kessler, D (2001). A question of intent: a great american battle with a deadly industry. New York, Gelbspan, R (1998). The heat is on: the climate N.Y.: Public Affairs Press. crisis, the cover-up, and the prescription, New York, N.Y.: Perseus Books. Klein, N (2007a). The shock doctrine: the rise of disaster capitalism. New York, N.Y.: Henry Holt & Gelbspan, R (2001, April 9). Bush's global warmers.. Co. The Nation., 272(14), 5-6. Klein, N Outsourcing government. (2007b, October Gelbspan, R (2004). Boiling Point. New York, N.Y.: 20). Los Angeles Times, on-line. Basic Books. Kluger, R (1997). Ashes to ashes: america's Gibbs, W. Gore and u.n. panel win peace prize for hundred-year cigarette war, the public health, and climate work, (2007, October 13). New York Times, the unabashed triumph of philip morris. New York, on-line. N.Y.: Random House Vintage Books. Glantz, S, Slade, J, Bero, L, Hanauer, P & Barnes, D Kolbert, E (2006). Field notes from a catastrophe: (1996). The cigarette papers, Berkeley, California: man, nature and climate change. New York, N.Y.: Univ. of California Press. Bloomsbury Press. Glantz, S, & Baldach, E (2000). Tobacco war. Kolbert, E (2007, January 22). Mr. Green: Berkeley, California: Univ. of California Press. environmentalism's most optimistic guru. The New Gore, A (2006). An inconvenient truth: the planetary Yorker, 34-40. emergency of global warming and what we can do Kunreuther, H, & Michel-Kerjan, E (2006, about it. New York, N.Y.: Rodale Press. November 16-17). Climate change, insurability of Gore, A Moving beyond kyoto. (2007, July 1). New large-scale disasters & the emerging liability York Times, on-line. challenge. Presented to Univ. of Pennsylvania Law Greider, W (2006, December 11). Friedman's cruel Review Conference on Climate Change, legacy. The Nation, 5-6. Philadelphia, Pa,
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Labaton, S Plan would ease f.c.c. restrictions on Oreskes, N (2004a).Science and public policy: what's media owners. (2007, October 18). New York Times, proof got to do with it?. Environmental Science & on-line. Policy. 7, 369-383. Lovins, A (1977). Soft energy paths: towards a Oreskes, N (2004b).Beyond the ivory tower: the durable peace. New York, N.Y.: Penguin. scientific consensus on climate change. Science. 306(No.5702), 1686. Lovins, A, Hawkins, P, & Lovins, L H (2000). Natural capitalism: creating the next industrial Oreskes, N My global warming study misrepresented revolution. Back Bay Books. by gossip. (2006, July 22-23). Wall Street Journal, p. A11.1. Lovins, A, McDonough, W, Atkisson, A, & Lovins, L H (2006). The natural advantage of nations: Oreskes, N The long consensus on climate change. business opportunities, innovation and governance in (2007, February 1). The Washington Post, p. A15. the 21st century, new ed. Earthscan Publications. Pacala, S & Socolow, R (2004, August 13). McKibben, B (2005, May-June). A special report on Stabilization wedges: solving the climate problem for global warming, big money, junk science & the the next 50 years with current technologies. Science. climate of denial. Mother Jones, 34-35. 305(no.5686), 968-972. This and other articles by the authors are available on-line at: Monastersky, R (2005, July 1). Congressman http://www.princeton.edu/wedges/articles/ demands complete records on climate research by 3 scientists who support theory of global warming. Pertschuk, M (2001). Smoke in their eyes: lessons in Chronicle of Higher Education, Retrieved July 1, movement leadership from the tobacco wars. 2007 from: Nashville, TN: Vanderbilt University Press. http://chronicle.com/daily/2005/07/200507010.htm Rabin, R, & Sugarman, S (1993). Smoking policy: Monastersky, R (2006, August 4). House panel law, politics and culture. New York,N.Y.: Oxford heatedly debates research behind global warming. University Press. Chronicle of Higher Education, A15.1. Rabin, R, & Sugarman, S (Eds.) (2001). Regulating Monastersky, R (2006, September 8). Climate change tobacco.New York,N.Y.: Oxford University Press. on trial. Chronicle of Higher Education, A10-15. Rich, A (2005). Think tanks, public policy, and the Mooney, C (2005a). The republican war on science. politics of expertise. Cambridge, U.K. & New York, New York, N.Y.: Perseus/Basic Books. N.Y.: Cambridge University Press. Mooney, C (2005b, May-June). Some like it hot. Rockwood, B (1989).Interstate banking and non- Mother Jones, 36-49. banking in america. Seton Hall Legislative Journal. 12(#2), 137-205. Moyers, B (1994, October 7). Ads and Health Care. PBS Bill Moyers Special with the Annenberg Center. Rockwood, B (2006).Climate change, science and business social responsibility. In J. Beloit (Ed.) Moyers, B (1999, June 8). Free speech for sale? . APUBEF Annual Proceedings. (pp. 103-128). PBS Bill Moyers Special with the Annenberg Center. Rockwood, B (2007a).Sixty Days and Counting Nesteruk, J (1996).A new narrative for corporate law. (Review). SFRA Review. #280, 22-23. Legal Studies Forum. XXIII(3), 281-292. Rockwood, B (2007b). Science Fiction and the War New York Times Editorial, Mr. cheney's imperial on Science in Contemporary Society. InT. J. presidency. (2005, December 23). New York Times, Morrissey and O. De Los Santos (Eds.), When on-line. Genres Collide (pp 1-15). Waterbury, CT: Fine Tooth Press.
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Rogers, R, & Harwood, J Conservative, pro-business Summers, L The great liberator. (2006, November think tanks take center stage before house panel. 19). New York Times, p. Sect. 4, WK13.1. (1995, January 12). Wall Street Journal, p. A15.1. Sunstein, C (2001). republic.com. Princeton, N.J.: Sachs, J (2007, November). Climate change and the Princeton University Press. law: even the bush administration has started to Thorne, D, Ferrell, O, & Ferrell, O (2008). Business recognize u.s. legal obligations to fight global and society: a strategic approach to social warming. Scientific American, 297(#5), 38-40. responsibility (3rd Ed.). Boston, Massachusetts: Samuelson, R J (2007, August 20-27). Greenhouse Houghton Mifflin. simplicities. Newsweek, 47. Union of Concerned Scientists (2007, January 3). Schapiro, M (2002, May 6). Big tobacco: uncovering Scientists‘ report documents exxonmobil‘s tobacco- the industry's multibillion-dollar global smuggling like disinformation campaign on global warming network. The Nation, 274(#17), 11-20. science. Retrieved from: http://www.ucsusa.org/news/press_release/ExxonMo Schendler, A Why are there still climate-change bil-GlobalWarming-tobacco.html deniers? (2007, April 30). High Country News, Retrieved from Viscusi, W (2002). Smoke-filled rooms: a http://www.hcn.org/servlets/hcn.PrintableArticle?arti postmortem on the tobacco deal. Chicago, Illinois: cle_id=16999 University of Chicago Press. Slovic, P (Ed.) (2001). Smoking: risk, perception, & White, J B (1985).How should we talk about policy. Thousand Oaks, California: Sage corporations? the languages of economics and of Publications. citizenship. Yale Law Journal. 94, 1416-1425. Stern, N (2007). The economics of climate change: White, J B (2006). Living speech: resisting the the stern review. Cambridge,U.K.: Cambridge empire of force. Princeton, N.J.: Princeton University University Press. A PDF of the report is on line: Press. http://www.hm- treasury.gov.uk/independent_reviews/stern_review_e conomics_climate_change/stern_review_report.cfm
Bruce Lindsley Rockwood is a professor of legal studies, and chair of the Department of Finance and Legal Studies, at Bloomsburg University of Pennsylvania. He received his BA in History (Honors) from Swarthmore College, and his J.D. from the University of Chicago Law School. His research interests include international law, law and literature, and corporate ethics and social responsibility. He welcomes comments and suggestions at: [email protected]
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USE OF REALWORLD EVENTS TO TEACH PRINCIPLES OF ECONOMICS Abdul B. Pathan, PA College of Technology
ABSTRACT
Many students of principles of economics find the subject very difficult to understand at first and do not find interest in the subject even though economics is a part and parcel of their life. Frequent use of real world examples involving current events to explain economic theory may be very helpful to improve motivation by showing the application of economic theory in everyday life. Assignments of finding newspaper articles relevant to teaching materials in class may also be helpful in this regard.
INTRODUCTION innovative teaching techniques,‖ (Becker and Walts, 1995, Page 449). However, more and more Understanding and applying economic concepts and instructors are using overhead projectors, VCRs, thinking may be very difficult for the vast majority of tapes, computer games, and the internet for our principles students at first. It is our responsibility instruction. A nationwide survey of economics as faculty members to make them understand the faculty indicated that students learn best when they relevance of economics to their lives. In order to do are actively engaged in or out of class. By active that, we need to motivate them to learn the subject engagement faculty surveyed used terms like and show them the use of economics in their lives. participation in class discussions and asking There has been a renewed emphasis in the teaching questions, active learning by doing cooperative and learning of undergraduate economics during the learning. When asked how their teaching methods last few years. Various studies have been done on the had changed in the last five years, fifty percent of the appropriate goals of principles of economics courses respondents indicated a movement away from and the effective ways of teaching economics straight lecture style toward increasing use of (Walstad and Saunders 1998, Becker and Walts 1995, question, discussion, in-class worksheets, and group 1996, and Benzing and Christ 1997). One of the main activities (Benzing and Christ, 1997). goals is to train students to be able to understand the economic concepts, analyze them, and apply them in Echoing the sentiment of other economics faculty, I the real world. A recent survey done by AA C@U feel the need for more student involvement in and out covering recent graduates and employers found out of class to keep them motivated. Traditional lecture that recent college graduates need more team work method does not reach out to many students in need ,communication and analytical skills and more of getting involved and is inadequate for motivating a opportunities for real world application of knowledge majority of them. including knowledge of global economy. Two-thirds of employers surveyed say that too many of today‘s It is relatively easy to motivate the students majoring graduates lack the skills to succeed in our global in economics since they already have a purpose for economy. This will definitely require us as faculty being in class. But the vast majority of our students to play the responsible role of teaching the students are non-majors who take economics as an elective. the right way and the right materials. This requires ―Learners motivation is a crucial variable in the student to learn higher order cognitive skills determining how much people learn and interest in which puts even more responsibility on us to the material to be learned and intent to learn are motivate our students. Even though some innovative powerful motivating tactics and the ability to use it techniques are being used in teaching economics, stimulates students‘ interest and intent to learn,‖ lecture paradigm still dominates the classroom. ―As a (Saunders, Page 92). Saunders defines ―learning as group, college economics teachers rarely use the acquisition and retention of knowledge and habits
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of thought in a way that permits them to be employed LESSON in a useful way after initial exposure has been terminated.‖ Saunders emphasizes four components As I have mentioned above, using cases to teach of learning: acquisition, retention, transfer, and economic principles and theories to upper level evaluation. For a comprehensive familiarity of the students is not as much of a challenge as it is for the cognitive domain of knowledge one good reference is freshman level principles course. Here I am sharing ‗Taxonomy of Educational Objectives: Cognitive with you how I have been using current newspaper Domain‘ by Ben Bloom, 1956. One can pose the articles to explain economic theory. I do it in two question regarding motivation by asking: What can I steps in both of my micro and macro classes. do to arouse interest of my students in what I am a. First, I require my students to do journals. They teaching? Along with using the methods of active have to look for a newspaper article which has the engagement mentioned above, use of cases or stories most connection with the chapter being covered in can be very helpful to bring relevance and usefulness class that week. For example, in chapter one, we of the material. ―To develop and maintain teach three basic fundamental questions of economic informative and captivating examples involves choices regarding allocation and scarcity: what, how, watching for them in reading material that ranges and whom. We teach opportunity cost, production from scholarly journals to out-of-town newspapers,‖ possibility curve, law of increasing opportunity cost, (Elzinga, 1998). economic growth and shifting of PPC, mixed Use of cases as a method of teaching is a powerful economy, market economy, and planned economy. I motivating tool. It enables students to apply the ask students to look for a recent article in the knowledge into practical examples and generates a newspaper, underline some words or ideas in that context for new ideas and connects new material with article that also appear in chapter one of the book, information already in students‘ memories (Shulman, make a summary of the article and share it with the 1992). It also allows students to become actively class and explain to the class as to why he/she picked involved with the information presented by analyzing that article by showing the connection. Each student them. Case studies can make abstract theories life talks for a minute or two in sharing. like by bringing real world connection. We want our b. The second step is for the class to make comments students to think like economists. Case method may on their fellow students‘ connection. If the student enhance our ability to teach our students to think like sharing the article failed to show a connection, his economists and make them able to understand the fellow students attending the class and listening to his real world. Two excellent studies using case method presentation try to bring out more connections. This to teach intermediate economics and developmental creates a lively discussion and application and economics are: ―The Case Method as a Strategy analysis of economic theory. My class size is Teaching Policy Analysis to Undergraduates: by Ann relatively small, having twenty-five to thirty students. D. Velenchik, 1995, and ―Beyond the Lecture: Case So I can spend one class meeting of fifty minutes or Teaching and the Learning of Economic Theory‖ by one hour and fifteen minutes very easily. I roughly do John A. Carlson and David W. Schodt, 1995. In both this four to five times during the semester. The first these studies, attempts were made to teach economic journal on chapter one and three covers the market theory by case method to upper level students of system with demand and supply as well as the economics majors. My attempt in this paper is to Invisible Hand. This is common for both macro and share my experience, how I use current events and micro classes. The second journal they do in macro is stories to teach freshman students in my principles from GDP, business cycle, inflation and class who take economics as an elective. unemployment. The third one is on fiscal policy and Keynesian stabilization policy. The fourth one and fifth one are from monetary policy, the role of
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Federal Reserve board, and/or supply side policy. In are different numbers about cost of the War in Iraq. micro classes, the second journal is from cost Some students brought the study of Linda Bilmes and production and efficiency, variable cost, and fixed Joe Stiglitz. This was about the cost of the War in cost. The third one is from perfect competition and Iraq exceeding $2 trillion (quoted in an article by imperfect competition. The fourth one is from labor Kevin Hill). One fascinating observation I am going market and hiring decision. The fifth one is from to share with you now is one shared by a student regulation and government intervention. Once they about the Law of Increasing O.C. (I do not know if get some experience on the first assignment, the some of you will agree with this observation!). On subsequent assignments become relatively easy. It is May 1, 2003 our President declared victory in the a learning experience. Even the students who War in Iraq by declaring ―Mission accomplished.‖ struggled to find a suitable example relevant to The total number of casualties was 139 soldiers. That chapter one, become comfortable and confident in was a monumental job done by our forces. As the their work on the subsequent chapters. rebuilding effort and insurgency dragged on we lost more than 3900 soldiers‘ lives so far. This is a clear SOME RECENT EVENTS THAT WERE case of Law of Increasing Opportunity Cost (source: PICKED & SHARED BY STUDENTS (DURING Williamsport Sun Gazette). I had to agree. SPRING AND FALL OF ’07) Other relevance to the War in Iraq is its impact on the 1. Hurricane Katrina and its effect on New Orleans oil market, gold prices, general rise in the cost of and our economy: (Some wanted to discuss production, and supply side inflation, and the September 11, 2001 event too. But since that was resulting rise in interest rates pursued by the Fed in widely known; I asked them to look for more recent the recent past. Also some related it to efficiency, and ones.) In the aftermath of Hurricane Katrina, among more recently in the later part of the semester, some other things, gas prices went up. There were many students related it to rising government expenditure articles published on it. Some students picked this causing huge deficits and national debt. Some of event to explain loss of resources and an inward shift them pointed to the connection of rising gas prices of PPC for New Orleans, opportunity cost of and fuel costs to major airlines losing money. US Air rebuilding efforts and even some attributed it to the has a commuter shuttle service operating two flights rising cost of gasoline because of shutting of some every day to Williamsport from Pittsburg which was refineries due to lack of power and relating it to a closed last November. Some students related it to MC leftward shift of the supply curve. That was the time and MR concepts of running a flight in addition to when GM and Ford announced layoffs of about efficiency. Sometimes, one event was picked by more 25,000 employees and GM was losing money on than one student. What made it more interesting was their SUV sales, whereas Toyota had rising sales of that different students used the same article but had a hybrid cars and made profits. Some students slightly different connection and reason for choosing connected it to the concepts of complements and it. That created a lively discussion. The GM story substitutes affecting demand and also the low about its trouble was picked mainly by micro elasticity of demand for gasoline. So as you can see, students. President Bush‘s budget plan and spending you can use one event to explain many relevant on war were picked to show a connection to concepts we cover from the book. My students could stabilization and opportunity cost. pick on the right news items appearing at the time. 3. The recent Housing market crisis can be used as a 2. There is always some news on the War in Iraq. spring board for a variety of policy discussion. Many Students go on the internet or read stories about Iraq students picked this news to discuss government War and its cost and impact on our economy. Some intervention with monetary policy, how one event students picked stories about Iraq War and the can ripple through out the economy in the form of rebuilding effort to explain opportunity cost. There low appliance demand , ,how foreclosures lead to
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lower income for some and how expectation can Street Journal and other papers which help them to affect the demand curve and supply curve of houses . keep abreast of what is going on in the economy. Few This news also was used by some to show connection made remarks like they found news about Ben to ARMs and Fixed Rate Mortgages and real and Bernnake succeeding Alan Greenspan on February 1, nominal interest rates and real balance effect. Some 2006 and when the first FOMC meeting presided by showed this as a possible reason for slow down in our him occurred. Obviously, this exercise helps them economy as shown by lower GDP growth. So as you improve their information literacy and critical can see ,finding a nice real world event can facilitate thinking ability. student understanding of rather technical and theoretical issue . CONCLUDING REMARKS
STUDENT SATISFACTION & So as you can see, one event or story can be used to GRADING/ASSESSMENT explain so many issues that we cover theoretically in class. Traditional lecture paradigm may not reach out Students are asked to submit all their journals at the to every student. Instead of considering ―how smart end of the semester. Initially when they share the are you,‖ we should emphasize ―how are you smart‖ journals in class, I also observe their presentation and approach. As Siegfried and Walstad put it, the best attempt in making the relevant connection. When instructional response is to ―offer a variety of course they submit the final report, they write out the assignments, use alternative teaching methods, and summary of the article in one paragraph and in adopt multiple types of assessment,‖ (Teaching another paragraph clearly give reasons for collecting Undergraduate Economics, Page 149). If the students the article by showing how that article relates to the see the real world connection of what they are chapter. They attach this report on one side of a two- learning, they become more motivated. One sided binder and on the other side they attach the challenge I face sometimes during the sharing time is article or a copy of the article after highlighting or that if the student has speech problems or if he or she underlining the concepts that appear in the article and is shy to speak before the class, he or she feels a little also appear in the chapter being discussed in class. discomfort. I tell them ahead of time to see me if they The articles can be from Wall Street Journal or any have any problems like that. I am sure some of you local paper or periodicals. Fifteen percent of their here in the audience also do similar assignments. I final grade is from these journals. I am going to personally think that this approach of teaching increase the weight of the grading on these journals economics may be very motivational for the vast next semester in view of the positive response I have majority of our non-majors. I may consider received during this spring semester. I give unofficial increasing the number of journals by a few more and midterm evaluations of my courses to get student allocate a bigger weight on the journals in their grade feedback half-way through the semester. One of the in the future to give students an added incentive to questions asked was about the journals and how these devote more time in finding even more suitable journals improve their understanding. Out of ninety articles for the journals. students in three sections, three students had a negative comment about the journals. They thought REFERENCES that the journals were too time consuming and it was At GM, Cuts in Pay and Benefits. In WallStreet hard to find good articles with clear connections to Journal. 8 February 2006. the reading materials. The rest had very positive responses about this assignment. They explicitly Becker and Walts. 1995. Teaching Tools: Teaching indicated that they can clearly see the real world Methods in Undergraduate Economics. Economic connection of what they are studying in the Inquiry. 1995. classroom. They also indicated that this assignment forces them to read outside materials like the Wall
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Becker and Walts. 1996. Chalk and Talk: A National Elzinga, Kenneth. 1998. Teaching Economics: Survey on Teaching Undergraduate Economics. Inspiration and Respiration. In Teaching AEA. May 1996. Undergraduate Economics: A Handbook for Instructors. Benzing and Christ. 1997. A Survey of Teaching Methods Among Economics Faculty. Journal of Hall, Kevin and Ridder, K. Iraq War Could Cost 2 Economic Education. JFF. Spring 1997. Trillion. In ContracostaTimes.com.
Bloom, Benjamin. 1956. Taxonomy of Educational Saunder, Phillip. Learning Theory and Instructional Objectives: Cognitive Domain. Objectives in Teaching Undergraduate Economics: A Handbook for Instructors. Bush Would Boost Defense, Security in Budget Plan. In WallStreet Journal. 7 February 2006. Wars, Defense, Hurricanes: More Money Sought. 3 February 2006. Carlson, John and Shoedt, David. 1995. Beyond the Lecture: Case Teaching and the Learning of the Walstad and Saunders. 1998. Teaching Economic Theory. JEE. Winter 1995. Undergraduate Economics: A Handbook for Instructors. Cost of Iraq War. In SunGazette. 18 March 2006. Valenchik, Ann. The Case Method as a Strategy for Demand for Sugar Lifts Price. In WallStreet Journal. Teaching Policy Analysis to Undergraduates. In JEE. 9 February 2006. 1995.
U.S. Annual War Spending Grows. In WallStreet Journal. 8 March 2006.
Abdul B. Pathan is a professor of economics at the PA College of Technology, 1 College Avenue, Williamsport, PA 17701.
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CONTRACT DESIGN FOR QUALITY CONTROL IN SUPPLY CHAIN MANAGEMENT Dong-Qing Yao, Towson University Nanyun Zhang, Towson University ______
ABSTRACT Cost reduction has been a major driver of outsourcing. However, recent recalls suggests that purchasing cost reduction alone is not enough. We need to take into account the total cost of ownership (TCO), which not only includes purchasing cost and transportation cost, but also the quality cost. In this paper, we consider a supply chain composed of one supplier and one buyer. From the buyer‘s perspective, we study how to design the contract to ensure the supplier to provide quality products. The model has a two-stage sequential move framework. We compare the case when the buyer has complete information about the supplier‘s efficiency level with incomplete information case. Our major findings are 1) optimal quality chosen by the supplier is increasing in his own cost efficiency, in the buyer‘s profit margin and in the wholesale price offered by the buyer; 2) the optimal wholesale price set by the buyer is decreasing in the supplier‘s cost efficiency level and in his own profit margin; 3) With asymmetric information about cost efficiency level of the supplier, the buyer must increase the wholesale price to induce cost information and quality level desired; and the price increase depends on how dispersed the cost efficiency distribution is in the industry. Our model also sheds light on further integrated study of supply chain management and total quality management. ______
1. Introduction the quality cost. Quality costs include inspection costs, warranty costs, and even potential recall cost In supply chain management, product quality due to quality defects. Therefore the buyer‘s management recently has drawn great attention of objective should minimize its total cost of ownership, both researchers and practitioners. Mattel‘s toy recalls due to lead paint incurred huge recall cost for in this paper; we specifically consider the purchasing the Mattel. cost and quality cost.
Supply chain management and total quality Several papers are closely related to our paper in management are two important topics; however they literature. Robinson and Malhotra [2005] argue that used to be fragmented in research. Recently extensive quality practices must advance from traditional firm research has been done to interlink supply chain centric and product-based mindsets to an inter- management with quality management. In this paper, organizational supply chain orientation involving we consider a supply chain composed of one supplier customers, suppliers, and other partners. They used a and one buyer. We assume due to global outsourcing, case study to show that quality management across e.g., the supplier is located in China, while the buyer inter-organizational supply chains is sorely needed in is in USA, the supplier‘s information can be delivering value to customers in often globally incomplete to the buyer (sometimes the supplier also scattered supply chains. Their study offers a good subcontracted some tasks to its suppliers). From the concept framework from which we established our buyer‘s perspective, we study how to design the theoretical model. quality into the contract, i.e., to design the contract to ensure the supplier to provide quality products. Bond [1984] presents a model of international trade in which consumers are unable to determine the The major driver of outsourcing is the cost reduction. quality of individual products until after the purchase However, recent recalls suggests that purchasing has been made. It finds that origin labels can play cost reduction alone is not enough, we need to take important role in improving the welfare for the into account the total cost of ownership (TCO), i.e., country producing higher quality products. In the not only purchasing cost, transportation cost, but also absence of origin labels, the higher quality domestic
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producer can be worse off if the country imports its cost. For example, toy-maker Fisher-Price or lower quality products because the lower quality Mattel have their product supply chains in China and reduces average quality in the market. In our model, earn a profit for their design and brand name. The the quality is observable to the buyers and the final suppliers, on the other hand, have their control on consumers. The uncertainty only lies in the cost and quality. We model a simple game with only production costs for producing certain level quality one buyer, denoted by B, and one supplier, denoted products. by S. It‘s a two-stage game; the sequences of moves are as follows: Reitzes [1992] examines quality choices in a duopoly with one foreign and one domestic firm, where (1) The buyer sets wholesale price to maximize its consumers have similar preferences for quality but profit. The mark-up is exogenously given in our different preferences for brands. Firms make quality model. commitments prior to choosing price. It finds that in (2) The supplier sets quality of order to maximize its the absence of set-up costs and with complete profit. The quality is measurable and observable to information, both domestic and foreign firms make consumers. The buyer and the supplier will share any socially optimal quality choices. In the presence of quality loss according to a conventional rule. set-up costs, the foreign firm, and often the domestic firm, sets quality below the socially optimal level. Before describing the model in detail, we listed our Our model focuses on quality issue in supply chain key notations as follows: settings and the decisions of price and quality are p: the wholesale price set by the buyer made separately. q: the quality of order set by the supplier Kehoe [1996] studies a monopoly firm‘s pricing strategy in a market in which consumers have : the mark-up, or the profit margin of the varying and imprecise estimates of the quality of the product earned by the buyer, treated as exogenous firm‘s product. It finds that the firm‘s price declines variable in our model. in response to an increase in the level of consumer uncertainty about quality when consumer tastes for : proportion of quality loss shared by the the product are sufficiently similar and their supplier. uncertainty about quality is sufficiently small. When one or both of these conditions fails to hold, however, d: the market demand of the final product. the monopoly‘s price is positively related to the level 2.1 Elements of the model of consumer uncertainty about quality. In our model, consumer respond to quality change; but their taste is 2.1.1 Demand function kept as exogenous and constant. In our model, consumers care both price and quality. This paper will proceed as follows: in section 2, the The final price P is the sum of the whole sale price case with complete information is analyzed; section 3 and mark-up. The demand on the final product is a introduce asymmetric information about cost linear function of pp and q: efficiency level between the buyer and the supplier; d () p p q . and we conduct a comparison of equilibria between the two cases and analyze the quality management Where, measures the potential market base for the strategies implied by the model. Section 4 concludes. product, and denotes the own price elasticity on 2. Model with complete information: demand. > 0 and > 0. Our main interests lie in , the marginal effect of quality on demand. Since We consider a scenario where a domestic buyer customers favor higher quality product, all else equal, outsources its production to a cheaper location to cut .
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We also make two assumptions about these kq(1 )2 parameters in the demand function: Cq() 2 (1) For simplicity and without loss of generality, we This function is also strictly convex and has will assume that = 1 and = 1. Thus, we can 2 rewrite the demand function as: dC() q d C() q the properties of 0 and 2 0 . d1 ( p ) q . dq dq Parameter k is loss coefficient and measures the (2) We assume that the quality effect is not greater severity of the quality problem and the magnitude of than the price effect, thus, (0,1) . the related costs. For example, lead painting hazard in toys may only incur recall costs to the buyers, but laptop battery exploding will cost the seller more for 2.1.2. Supplier’s production cost function compensation and penalty. Thus, parameter k is determined by the characteristics of the potential The unit cost borne by the supplier is strictly convex quality issue relating to different products. in quality. We use the commonly adopted form as below: When quality related problems occur, the buyer and the supplier will share the cost. Assume that the q2 cq() supplier will share a proportion of and the buyer 2 share (1 – ). The reason that we will treat as an exogenous variable instead of a control variable is dc() q This function has the properties of 0 and due to the potential unverifiability of the quality loss. dq 2.1.4. Profit functions: d2 c() q 0 . is the efficiency parameters of the dq2 For the buyer, although it must incur some costs supplier‘s cost structure. The smaller the , the more for designing and marketing the products, we efficient the supplier is. In this section of the paper, assume that the marginal production cost is zero. we assume that the buyer has the full information The only cost term matters in the objective about . In the later section, this assumption will be function for the buyer is its quality cost share. relaxed and only the supplier itself knows about its Thus the buyer’s profit function can be written as: cost efficiency level. B ( p (1 ) C ( q )) d
The supplier has two cost terms, the unit 2.1.3. Taguchi quality cost function production cost and the quality problem cost sharing. Its profit function is as follows: Taguchi cost function is typically used to measure quality cost function in total quality management
(TQM). According to Taguchi cost function, any S (p c ( q ) C ( q )) d deviation from the target value represents poor quality, thereby incurring cost. The farther away Next, we solve the game using backward induction. from the target the deviation is, the larger the cost. In this paper, we assume the quality 2.2. Equilibrium analysis q[0,1] and 1 is the quality target. Any deviation from the target may incur quality costs 2.2.1 Stage 2: Supplier’s equilibrium (e.g., warranty costs or even possible recall costs). We assume the quality cost per unit is described as follows:
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In the second stage, after receiving the wholesale q price offered by the buyer, the supplier chooses its 1 optimal quality level to maximize its profit. That is, 0.8 kq( 1)2 2 0.6 MaxS ( p q )(1 ( p p ) q ) q 22 0.4
Solving the model, we get the following proposition: 0.2
0.2 0.4 0.6 0.8 1
Proposition 1: There exists unique equilibrium quality for the supplier: Intuitively, the more cost efficient the supplier is, the higher the product quality it chooses to produce. If cost efficiency acts as an essential factor that influences the quality choice, then the implication for tv2 k ( tv k )2 3 2 (2 pv vk k 2 2 ) the buyer is to pick an efficient supplier to achieve qp*() better quality control. The problem is, very often, 3v cost efficiency information is only known to the t p p 1 suppliers themselves. We will address this quality where vk control issue with asymmetric information in the next section.
Lemma 2: The supplier‘s optimal quality, Proof: it can be directly solved from the first order condition of the objective function. ), is increasing in the product mark-up , all else equal.
The implication of the proposition 1 is: the supplier has a unique optional choice of quality level, given a Proof: see the appendix. A simple graph is drawn contract with the buyer about the loss sharing and the below from Mathematica. wholesale price. The optimal quality is also a function of the supplier‘s own cost structure and q severity of potential quality problem. 0.9
Conducting comparative static analyses, we obtain 0.8 following results.
0.7
Lemma 1: The supplier‘s optimal quality, 0.6 q*(,,,,) p k ), is decreasing in its cost
efficiency coefficient, , all else equal. 0.2 0.4 0.6 0.8 1
This result seems to counter intuition. Why could the quality level chosen by the supplier be increasing in Proof: see the appendix. A simple graph is drawn the buyer‘s profit margin? Notice that the parameter below from Mathematica: has the chance to influence the supplier‘s decision
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only through the demand function: equal; thus it gives incentives to the supplier for d1 ( p ) q . Given p and , increasing higher quality to make up for the lower demand. will reduce demand; to compensate the loss of market They both result in and reinforce a positive size, the supplier will have more incentive to improve relationship between q and p. the quality. In other words, when a company wins a contract doing business with Wal-mart, its low margin business model implies a larger market and As for other parameters, k, and , their influences also provides more flexibility in quality choices. For on the optimal quality are much more complicated example, when Jim Wier, the lawn mower maker and cannot be expressed by simple relationship Snapper‘s CEO, said no to Wal-Mart and sold his founded in above lemmas. The reason is, all these products through high-margin independent lawn- three parameters are coefficients of the quality equipment dealers, he had determined to lead variable, q. Thus, their effects are tangled together Snapper to focus on quality, i.e., performance and and hardly detected. longevity. On the other hand, the lawn mowers staying in Wal-Mart may be cheap enough to be disposable. 2.2.2. Stage 1: Buyer’s equilibrium
In the first stage, the buyer decides the Lemma 3: If (1 ) 2 , the supplier‘s optimal wholesale price, p, to maximize its profit. The objective function is: quality, q*(,,,,) p k ), is increasing in the wholesale price, p, all else equal. kq( 1)2 MaxB ( p (1 ) ))(1 ( p p ) q ) p 2
Proof: see the appendix.
q Proposition 2: There exists a unique equilibrium wholesale price choice p* for the buyer. 0.9
0.8
0.7 Proof: Results can be obtained from Mathematica simulation. Proof can be provided upon request.
0.6
0.5 The buyer‘s purpose is to set the wholesale price that 0.4 induces the optimal quality from the supplier so that he can maximize the profit. Proposition 1 indicates p 0.2 0.4 0.6 0.8 1 the existence and the uniqueness of the equilibrium The wholesale price affects the supplier‘s quality wholesale price. We further derive two lemmas from choice through two ways. First, wholesale price evaluations on specific sets of parameters to analyze provides direct reward to the supplier to cover its the factors that affect the equilibrium. production cost for producing high quality product.
Second, it has similar effect as , that is, higher wholesale price implies higher retail price, all else
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Lemma 4: Optimal wholesale price is increasing in The buyer‘s pre-quality-cost profit is p. If the supplier‘s cost efficiency coefficient, , all else increases, then he has more room to lower the equal. wholesale price and still maintain the profit level. According to lemma 3, lower wholesale price will Proof: Results can be obtained from Mathematica induce lower quality level; then it is contradictory simulation. Proof can be provided upon request. with Lemma 2 that states that quality is increasing in profit margin . Here are our explanations. First,
Lemma 5 itself does not indicate any causal Optimal wholesale price in change with eta relationship between and p; is treated as an 0.9 exogenous variable in our model and measures the 0.8 0.7 average profit margin. If firms adjust according to the wholesale prices, then the finding in Lemma 5 is 0.6 0.5 purely theoretical. Second, it could be that does
p* p* 0.4 have positive effect on quality directly and have 0.3 negative effect on quality through the wholesale 0.2
0.1 price. The net effect might be found through 0 empirical studies, which calls for further research on
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 the topic. Eta
Lemma 6: The buyer‘s optimal wholesale price is This is to say that the buyer will offer higher decreasing in . wholesale prices to the producer with lower cost Proof: Results can be obtained from Mathematica efficiency level. Combining with Lemma 1, the simulation. Proof can be provided upon request. finding is rather surprising: when the supplier improves its cost efficiency level, it will choose to produce higher quality products, but the buyer will Optimal Wholesale price p* in change with Theta lower the offer. The implication is, since higher 0.9 efficiency is to be punished, the supplier always has 0.8 the incentive to understate his real cost efficiency 0.7 0.6 level. 0.5
p* p* 0.4 Lemma 5: Optimal wholesale price is decreasing in 0.3 the buyer‘s profit margin, , all else equal. 0.2 0.1 0 Proof: Results can be obtained from Mathematica 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Theta simulation. Proof can be provided upon request.
Notice denotes the share of quality loss of the Optimal wholesale price p* in change with lambda supplier. So Lemma 6 is equivalent to say that they
0.95 buyer‘s optimal price is increasing in his own share 0.9 of quality loss. The intuition is, when the buyer‘s
0.85 potential cost on quality loss is reduced, he is more likely to lower the wholesale price. Combining with
p* 0.8 p* Lemma 3, the further implication is, if the supplier 0.75 bears more quality loss, he will choose to produce at 0.7 lower quality level. In other words, it is the buyer 0.65 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 Lambda NABET Proceedings 2007 351
who ultimately needs to choose between profit and Solve the maximization problem, we get: quality where the intrinsic conflict exists. Proposition 3: The optimal wholesale price and 3. Model with asymmetric information quality are lower in equilibrium when the buyer has incomplete information about the supplier‘s cost With complete information, lemma 1 concludes that efficiency level. the supplier‘s optimal quality is decreasing in its own cost efficiency level, , all else being equal. The Proof: Results can be obtained from Mathematica question is, what if cost efficiency level is private simulation. Proof can be provided upon request. information and unknown to the buyer. In this section, we introduce asymmetric information into The intuition is, when the buyer does not have enough information about the supplier‘s cost, it will our model regarding cost parameter . We still use be more likely to lower the price to cover the following cost function: potential quality costs, which results in lower quality q2 level in equilibrium. Another explanation is, cq() unknown value of the cost coefficient causes a 2 typical adverse selection problem. That is, the more efficient suppliers are paid as an average producer The buyer does not know the supplier‘s efficiency and it will reduce the incentive of being efficient and level, but he can estimate the probability distribution quality level in the market will deteriorate of the parameter from the whole industry‘s unavoidably. information. For simplicity, we assume is uniformly distributed, i.e., ~ U [,] . From quality management point view, the denotes the deviation of cost structure; the larger the effectiveness of the buyer‘s quality management , the more dispersed the industry. The buyer now strategy relies on how it can induce more information needs to estimate the average cost coefficient and about cost efficiency level from the supplier. To achieve this goal, increasing wholesale price and or the deviation . reduce the quality loss share borne by the supplier are Since the supplier has the same information as in the the possible ways to maintain the original quality earlier section, his maximization problem is kept as level when full information is available. before. The buyer now faces the following objective function: Gap in optimal wholesale price with changes in Epsilon
0.77 Max E[] B p 0.76
kq(1 )2 0.75 (p (1 ) ))(1 ( p p ) q ) f ( ) d 0.74 2 0.73 p* 0.72 p*(I) 0.71 0.7 Given the uniform distribution of , we can rewrite Optimal wholesale price 0.69 the maximization problem as: 0.68 0 0.1 0.2 0.3 0.4 0.5 Epsilon Max E[] B p 1 kq (1 )2 (p (1 ) ))(1 ( p p ) q ) d 22
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Gap in optimal quality with changes in Epsilon Buyer's profit in change with Epsilon 0.82 0.045 0.8 0.04 0.78 0.035 q* 0.76 q*(I) 0.03
0.74 Optimal quality 0.025 Profit Profit (I) 0.72 0.02
Buyer's profit Buyer's 0.015 0.7 0 0.1 0.2 0.3 0.4 0.5 0.01 Epsilon 0.005 0 0 0.1 0.2 0.3 0.4 0.5 Epsilon Proposition 4: To fill the quality gap between full information and the incomplete information, wholesale price increase needed is increasing in .
Proof: Results can be obtained from Mathematica Supplier's profit in change with Epsilon simulation. Proof can be provided upon request. 0.021
0.0205 measures the dispersal of the cost efficiency level of the supplier in an industry. The more dispersed the 0.02 cost structure the industry is, the lower the new Profit Profit (I) equilibrium wholesale price and the more price 0.0195 increase is needed to provide enough incentive to Supplier's profit maintain the quality level of the industry. 0.019
0.0185 Proposition 5: The difference in profit between the 0 0.1 0.2 0.3 0.4 0.5 Epsilon buyer and the seller is decreasing in .
Proof: Results can be obtained from Mathematica 4. Concluding Remarks: simulation. Proof can be provided upon request. In this paper, we use a simple two-stage sequential The implication of the proposition 5 is, the supplier move game to study quality control issue in a supply always has the incentive to keep the information chain system. We compare the case when the buyer about their efficiency level to himself, even at the has complete information about the supplier‘s efficiency level with incomplete information case. cost of lower final product quality. Thus, how to We found that the optimal quality chosen by the provide incentive to the supplier to share cost supplier is increasing in his own cost efficiency, in information with the buy is the major challenge when the buyer‘s profit margin and in the wholesale price asymmetric information exists. offered by the buyer; the optimal wholesale price set by the buyer is decreasing in the supplier‘s cost efficiency level and in his own profit margin. With asymmetric information about cost efficiency level of the supplier, the buyer must increase wholesale price to encourage cost information sharing and to maintain the desired quality level; and the price increase depends on how dispersed the cost efficiency distribution is in the industry. Also, the
profit gap between the supplier and the buy decreases in the distribution interval of the cost efficiency
coefficient.
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Further researches may generate interesting results Kehoe, Michael R. Quality Uncertain and Price in after relaxing the major assumptions we have made. Monopoly Markets. The Journal of Industrial First, since we assumed a one-buyer, one-supplier, Economics, Vol. 44, No. 1. March 1996, pp. 25~32. one round game setting, it is unclear to us how competition between two or suppliers or a repeated Knowledge@Wharton, 2007, Trouble in Toyland: game may change the optimal quality level chosen by New Challenges for Mattel – and 'Made in China'. the supplier and the corresponding quality August 22, Knowledge@Wharton. management strategies for the buyers. Second, in our Lee Hau L. and Seungjin Whang, 2005 Higher model, the cost sharing proportion between the Supply Chain Security with Lower Cost; Lesson buyers and the sellers are exogenous. If either the From Total Quality management. 96, 289-300. buyer or the supplier can endogenously determine or they can negotiate about , the model can have more Reitzes, James D. Quality Choice, Trade Policy, and strategy implication to the supply chain management. Firm Incentives. International Economic Review, Third, our model ignored uncertainty issue regarding Vol. 33, No. 4, November 1992, pp. 817~835. quality, either the quality resulted in the supplier chain or the quality perceived by the consumers. But Robinson Carol J. and Manoj K. Malhortra, 2005, uncertainty exists on both of the aspects. We believe Defining the Concept of supply Chain Quality any further research on the above three directions can management and Its relevance to Academic and have important discoveries for practice in quality Industrial Practice. International Journal of contract design. production Economics, 96. 315-337.
REFERENCES
Bond, Eric W. International Trade with Uncertain Product Quality. Southern Economics Journal, Vol. 51, No. 1, July 1984, pp. 196~207.
Dong-Qing Yao, is an associate professor of management at Towson University. Nanyun Zhang, is an assistant professor of economics at Towson University.
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APPENDIX
Lemma 1:
Proof:
(2pv ( k (1 )3) k ((23) k (25) * q 2 = 4(t k ( t 2)) 3( v k ( 2)2( p k (1 ))))) 6v22 ( t k ( t 2)) 3(( v k 2)2((1 p k )))
p* It can be shown that as long as q 1 , 0
Lemma 2:
Proof:
v( t k ( t )) * pv() q (t k ( t 2)) 2 3(( v k 2)2((1 p k ) ))) = 3 v 0
Lemma 3:
Proof:
v(32 ( tv k )(1 )) * (1 )v ) q (t k ( t 2)) 2 3(( v k 2)2((1 p k ) ))) = p 3 v
q* It can be proved that if (1 ) 2 , 0 p
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JOURNAL OF THE NORTHEASTERN ASSOCIATION OF BUSINESS, ECONOMICS AND TECHNOLOGY: CONTENT AND PROCESS ISSUES Kevin J. Roth, Clarion University Of Pennsylvania
ABSTRACT
The Journal of the Northeastern Association of Business, Economics and Technology (JNABET) is a scholarly publication designed to provide opportunities to a diverse group of faculty and professionals with a common interest in the business discipline. The Journal has recently (2007 publication) undergone a name change from the Pennsylvania Journal of Business and Economics. This change reflects the expanded nature and scope of authors, review board and reviewers. Contributions are encouraged on both a regional and national scope. The primary target of the Journal continues to be placed on business and economics faculty although practitioner contributions are also welcome. The Journal is sponsored by the Northeastern Association of Business, Economics and Technology (formerly APUBEF).
The Journal is currently under the leadership of Dr. Kevin J. Roth of Clarion University serving as editor. A new co-editor will be joining soon to facilitate the review process. This document describes recent changes and enhancements to the publication process surrounding the journal. It addresses both the initial and final submission guidelines for submission of an article. In addition, the paper highlights editor expectations and identifies several emerging issues. Several areas of Journal administration are identified and discussed to continue the improvement and quality of the manuscript review process. In addition modifications have been implemented to facilitate communication flow among participants, and direct efforts towards continuous quality improvement of the Journal.
THE JOURNAL OF THE NORTHEASTERN related faculty and professionals. The Journal seeks ASSOCIATION OF BUSINESS, ECONOMICS AND manuscripts from a diversity of business topics TECHNOLOGY: CONTENT AND PROCESS ISSUES including the functional areas of business and pedagogical topics of both a conceptual and empirical Contact Information nature. Most recently, the Journal has extended its geographic scope beyond the traditional emphasis on Dr. Kevin J. Roth Pennsylvania Faculty and the State System of Higher Professor and Chairperson, Department of Education in Pennsylvania. This has occurred in both Administrative Science accepted articles and reviewers. Room 335 Still Hall College of Business Administration EDITOR CHANGES Clarion University of Pennsylvania Dr. Kevin J. Roth, Professor of Administrative Phone (814) 393-2626 Science at Clarion University will continue his role Fax (814) 393-1910 as co-editor. He will coordinate all matters relating [email protected] to final editing and facilitating the production and publication of the Journal itself. The Journal is INTRODUCTION currently seeking a co-editor who will have The Journal of the Northeastern Association of responsibility for coordinating the manuscript Business, Economics and Technology is published by submission and review process. I would like to thank the Northeastern Association of Business, Economics Dr. Leon Markowicz from Lebanon Valley College and Technology (NABET). The target audience for his work as past co-editor who has held this consists of but is not limited to business or business
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position for several years. Discussion is under way only helps to ensure such quality but promotes a to add an associate editor who will have broader recognition of our publication. Our responsibility to screen papers both in terms of acceptance rate is currently 30-35% reflecting our specific content and presentation style and clarity. It consistent move towards higher quality. The Journal is the hope of the executive board that this individual and NABET have adopted a continuous improvement will be in place for the next publication of the philosophy. The next edition of Cabell‘s will reflect journal. any name changes and enhancements recently made to our publication. CONTINUED EXPANSION AND FORMALIZATION OF THE INITIAL SUBMISSION REQUIREMENTS EDITORIAL REVIEW BOARD For initial submissions to the journal, please provide It is the intent to continue (but not limit) our four copies of your paper with a title page containing development with the inclusion of additional complete author information on one copy only. With Colleges/Universities who actively participate in your paper copies, please enclose a check or money NABET and our annual conference. The overall order, made out to NABET, for $20 as a submission objective is to create a diverse review board both in fee. This fee goes directly to help defray the costs of terms of geographic location and interest area. producing and distributing the Journal. Initial submissions are subject to a blind review process by Review Board responsibilities continue to include two different reviewers and the Journal editors. receiving a manuscript submission from the editors Authors will be informed of the results of this process and personally reviewing or distributing the paper to when reviews are complete. Keep in mind that our an appropriate colleague at that school. The intent is editors and reviewers serve strictly on a volunteer to try to match the Journal content with a reviewer basis and that the review process can take some time. that has expertise in that subject area. Members will thus be responsible for coordinating the review FINAL SUBMISSION REQUIREMENTS process for a given paper and ensuring the process is Authors will be notified directly from the editor(s) completed in a timely fashion with a target of eight to upon acceptance, rejection or necessary revision of a ten weeks). Reviewers will ultimately be responsible paper. Any final recommendations made by for submitting review materials to the editors. reviewers/editors shall be incorporated into the final Throughout the review process, all correspondence document submission. Final submissions generally with the author(s) will be handled directly by the will follow APA guidelines and submitted on disk editors. along with a hard copy. The requirements for final Each year at the NABET conference, (normally submission are shown in Exhibit-A. In addition to October) review board members will be able to the final submission, an author biography information provide input from their colleagues. Members will form shall be submitted upon acceptance. This form also coordinate posting of requests for papers each is shown in Exhibit-B. year. Editorial board members will serve annual ARTICLE REVIEW PROCESS renewable terms and be requested each fall to continue or recommend a colleague to serve. The Journal exists due to the voluntary contributions Members will be listed as the ―editorial review of many individuals. We will continue to rely on board‖ in each Journal publication. volunteers to coordinate a double blind review process for each paper. Because we exist as an CONTINUOUS IMPROVEMENT instrument specifically dedicated to serving NABET The journal continues to appear in Cabell‘s Directory members, we suggest that reviews be constructive accenting the commitment to maintaining a journal of and positive where possible and comments be the highest possible quality. This directory listing not directed toward producing a publishable product. While comments can be made directly on a submitted
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manuscript, we will continue the use of the general target audience. In terms of the review completed review forms to provide consistent and process with the proposed editorial board structure, sufficient feedback to the authors. Any comments we anticipate more concise matching of papers with along with the review form will be anonymously sent expertise and improved turn-around time for our directly to the author. A copy of the reviewer authors. The intent is to achieve increased evaluation form is provided in Exhibit-C. participation in the process and the publication of the Journal itself (editors, authors, editorial review board, EXPECTATIONS AND OUTCOMES reviewers, book review authors, invited article The editors anticipate several direct benefits from the authors, etc.). We continue to move towards the changes and enhancements identified above. These consistent publication of one to two journals each modifications are specifically designed to facilitate year with an emphasis on continuous quality more efficient and effective communication between improvement. editors and reviewers, review board members and reviewers, editors and authors, and editors and the
Kevin J. Roth is a professor of administrative science at Clarion University where he teaches strategic management, entrepreneurship graduate management courses. His present research interests primarily include quality, location strategy and community planning.
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APPENDIX-A
JOURNAL OF THE NORTHEASTERN ASSOCIATION OF BUSINESS, ECONOMICS AND TECHNOLOGY FINAL SUBMISSION REQUIREMENTS
SUBMISSION: Submit as a Word attachment.
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TABS: Use the default tab stops of 0.5‖. The first line of every paragraph should be tabbed. See attached example.
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FOOTER: Line across the top of the footer and typed directly under that line: Journal of the Northeastern Association of Business, Economics and Technology. The page numbering will be entered at a later time. Do not enter page numbers. See attached example. The footer definition should be 0.5. To verify this, click on File; Page Set Up; Layout. The setting should read 0.5‖ for the header and footer.
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EXAMPLE
THE IMPACT OF THE TAX REFORM ACT OF 1986 ON THE REAL ESTATE AND SAVINGS AND LOAN INDUSTRIES
Jerry Belloit, Clarion University of Pennsylvania Anthony Grenci, Clarion University of Pennsylvania
ABSTRACT
The Tax Reform Act of 1986 dramatically restructured many aspects of the taxation of income, particularly income from real estate rentals. Among the unintended consequences of this tax reform was a dramatic reduction in the most probable sales prices of income-producing properties. As a consequence of that reduction in prices, many investment properties experienced situations where the value decline was sufficient to leave a mortgage on the property that was greater than the price the property was likely to sell for. Many property owners in that situation chose to default on their loans. Since the value of the property was less than the mortgage value, significant losses for the lenders occurred. During the years immediately following the legislation, there was a near collapse of the savings and loan industry resulting from these loans‘ loses.
INTRODUCTION more negative impact as they began a downward spiral in values as the supply of properties increased. The Tax Reform Act of 1986 (TRA) had a As the lenders sold more properties in an attempt to profound impact upon the real estate industry and as recover on the defaulted loans, prices were driven a result, the Savings and Loan Industry. It has often downward even more. As prices fell further, more been suggested that the collapse of the industry owners found themselves paying on mortgages that during the late 1980s and early 1990s was a result of were greater than the values of the properties that poor management, fraud and incompetent appraisals. secured them. This spiraling decline became so This paper will suggest that another substantial severe in some markets that prices dropped as much reason for the Savings and Loan difficulties during as 75%. the late 1980s and early 1990s were the losses incurred through the default of real estate loans To understand how this occurred, it is caused by the loss in values of the properties used as important to return to the end of the Carter collateral for those loans. Administration in 1980. At that time, the top marginal tax bracket was very high (70%). Taxable This paper will show how the values income losses from real estate operations could be decreased by about 29-31% as a result of the used to offset earned income without significant reduction in after-tax income from the limitation. Many doctors and other high income implementation of the 1986 Tax Reform Act. With earners sought out real estate investments and typical loan-to-value ratios of 80%, this reduction left structured them so that they would have a positive little or no equity in many properties. In addition, cash flow but a negative taxable income primarily where there were market weakness from overbuilding because of the depreciation deduction. and a decline in the oil industry, many property owners found that they were unable to collect as Depreciation allowances allowed the much rent as they had forecast. When faced with taxpayer to elect any class life for their real estate little or no equity in the properties and negative cash property provided that the life was justified. This flows, many defaulted. These defaults had an even might allow a depreciable life for a convenience store
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EXAMPLE
REFERENCES
Shenkman, M. M. (1987). Investing in Real Estate After Tax Reform. Chief Executive, 39, 54-59.
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EXAMPLE RESULTS
Three groups were chosen to facilitate the There were no significant differences comparison of relative positions: (1) Hispanics high between Anglos (mean=.1214) and Hispanics in acculturation, (2) Hispanics low in acculturation (mean=.1489) in their reported usage of television as and (3) Anglos. In order to get a strong response from sources of information on paint, F(1, 279)=.452, a variety of geographic regions, telephone surveys p>.05. Radio usage showed no significant differences were conducted over two weekends. A telephone for the groups studied: Anglos (mean=.0286); bank from a local university was rented for survey Hispanics (mean=.0213); F(1, 279)=.153, p>.05). administration. The survey administrators were Further analysis revealed no differences between given, on average, one hour of training in which the Hispanics high in acculturation (HHIA) survey was explained. The administrators were (mean=.0282) and those low in acculturation (HLIA) allowed to practice until they felt comfortable with (mean=.0143); F(1, 279=.322) p>.05. for radio as a the survey and recording of the information. Calling source of information. There was marginal took place from 2 p.m. – 10 p.m., which significance for differences between Hispanics high accommodated the various time zones. The survey in acculturation (HHIA) (mean=.0986) and Hispanics took, on average, 15 minutes to complete and most low in acculturation (HLIA) (mean=.20) on television survey administrators completed an average of two usage F(1,279)=2.878, p<.1. These results are surveys per hour. A total of 316 surveys were summarized in Table 1. completed. Of those, 292 were usable (i.e., could be classified as either Hispanic or Anglo). Table 1 also shows a breakdown of how many people indicated they used television and radio Of the 292 usable surveys, 148 were as sources of information on paint. As can be seen, Hispanic and 144 were Anglo. The Hispanic group only 17 out of 140 Anglos (12%) indicated using was divided into high and low acculturation groups television as a source of information on paint. There by using the median of the acculturation score. Based were 21 out of 141 (14.8%) Hispanics that stated they on the acculturation score, each individual was used television as a source of information on paint. categorized into either the high level (HHIA) or low The percentages were even smaller for radio with 4 level (HLIA) of acculturation. A respondent with an out of 140 (2.9%) indicating they used the radio as a acculturation score greater than the median (17) was source of information on paint. Of Hispanics, 3 out of included in the HHIA and those with acculturation 141 (2.1%) used the radio. scores less than or equal to the median were placed in the HLIA category. Acculturation scores ranged from Table 1 3 to 28. The result was 73 respondents in the high ANOVA Summary for Hypotheses 1 and 2 acculturated group (HHIA) and 75 in the low H1 acculturated group (HLIA). N No Yes Mean F Sig. Television Dependent Variable Anglo 140 123 17 .1214 .452 .502 Hispanic 141 120 21 .1489 The question used to measure hypotheses one and H1 - two was, ―Where are you most likely to get Radio information on paint? I‘ll read a list and you tell me Anglo 140 136 4 .0286 .153 .696 the ones that apply to you.‖ Each item was read to the Hispanic 141 138 3 .0213 H2- respondent, who then indicated a yes or no in Television response to each source. The following information HHIA 71 64 7 .0986 2.878 .092 source choices were provided: (1) newspaper, (2) HLIA 70 56 14 .2 sales circulars, (3) television, (4) neighbor or friend, H2-
(5) at a store that sells paint, (6) internet, (7) radio, Radio (8) magazine, (9) other. HHIA 71 69 2 .0282 .322 .571 HLIA 70 69 1 .0143 NABET Proceedings 2007 362
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Kevin J. Roth is a Professor of Administrative Science at Clarion University where he teaches Strategic Management, Entrepreneurship Graduate Management Courses. His present research interests primarily include quality, location strategy and community planning. This work was supported in part by a grant from the University Fellows Program at Clarion University.
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LURKERS AND PARTICIPATION INEQUALITY IN SERVICE ELECTRONIC WORD OF MOUTH Dr. Lawrence E. Burgee, Towson University Dr. Erin M. Steffes, Towson University
ABSTRACT
A lurker is a person who reads discussions on blogs, rating sites, message boards, chat rooms, or other interactive systems, but rarely participates. Lurking is now the norm and is not viewed as negatively as it was in the past. Almost all bidirectional websites are lurker-dominant which results in a silent majority. The ratio of 90% lurkers, 9% infrequent contributors, and 1% high participation (regular contributors) has been found to be the most common participation type distribution. Lurking is accepted as part of the typical information gathering process. However, lurking results in participation inequality whereby a tiny minority of users account for a disproportionately large amount of content. We recently collected survey data from 482 current college students in which they rated the importance of various factors, including Service Electronic Word of Mouth (through RateMyProfessors.com), on their selection of university courses and professors. Our study yielded only 64% lurkers, with 9% infrequent contributors, and 27% regular contributors (64-9-27 ratio). This is a dramatic difference from the normal 90-9-1 ratio. We attribute this difference in lurker concentration between RateMyProfessors.com users and existing online community standards to many factors including the intangibility of services and great risk to students of a poor choice. Additionally, our research investigates what motivates students to be an active participant in a SeWOM website.
LURKERS AND LURKING and sufficient by the reader, then there may be no need for additional contributions. It may not be A lurker is a person who reads discussions and necessary or even desirable for large numbers of feedback on blogs, rating websites, message boards, online community members to post as it could lead to chat rooms, online communities, or other interactive information overload (Whittaker & Sidner, 1996). systems, but rarely or never participates (Nonnecke Lurking is accepted as part of the typical information & Preece, 2001). The concept of lurking has been gathering process and many times meets the personal studied for some time and is made possible by the and information-seeking needs of the lurker passive viewing of web-based materials by (Nonnecke & Preece, 2001). Beaudoin studied the individuals that choose not to get actively involved in ―invisible learner‖ and discovered that students lurk the communication process. in an online learning environment to gather Lurkers remain silent for a variety of reasons. They information from the more active ―high-visibility‖ may be reluctant to state a public opinion even if they contributors in the class (Beaudoin, 2002). know it will remain anonymous (Mason, 1999). The term lurker has evolved with a somewhat Some lurkers have a desire to understand the online negative connotation. In the non-Web world, to lurk community or rating medium (Gunnarsson, 1997; is to ―to lie in wait in a place of concealment Whittaker, Terveen, Hill, & Cherny, 1998) and may especially for an evil purpose, or, to move furtively need to be convinced of the value of the medium or inconspicuously and to persist in staying‖ before possibly making a contribution. Oftentimes (Merriam-Webster, 2007). The lurker is seen as a there is a belief that there is no reason to post spy or even possibly a villain. Lurking online has (Nonnecke, 2000). For instance, if the number of been compared to the similar real-world situation published responses or feedback is deemed accurate
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involving politics, where all citizens can participate environments result in participation inequality (PI) equally if they so choose, but only a few actually do whereby a small minority of users account for a (Berelson, Lazarsfeld, & McPhee, 1954). Lurkers on disproportionately large amount of content. PI in the the Web have been characterized as free-riders realm of computer-supported cooperative work was (Kollock & Smith, 1996), free-loaders, and societal first examined in the early 1990‘s by Will Hill who benefit-takers who offer nothing in return (Ebner & observed the phenomenon (Hill, Hollan, Wroblewski, Holzinger, 2005). & McCandless, 1992).
However, lurking is so prevalent on the Web, that Through the examination of various research studies over time the negative attributes have been lessened focused on online communities, it has been shown and it is the norm in nearly all online environments that about 90% of users are lurkers who never (Nielsen, 2006). Lurkers are the masses that contribute, 9% of users contribute a small amount, consume the blogs and other personal statements so and 1% are regular posters that account for nearly all popular in today‘s Web 2.0 community-focused sites. contributions and interactions This lurker to rare (or Bloggers publish for the benefit of lurkers so that the one-time) contributor to active poster PI ratio is blogger can be heard. Marketers know that every known as the 90-9-1 rule (Nielsen, 2006). lurker is a potential customer. Amazon.com thrives Newsgroups were studied in the 1990s and it was in the retail environment in which lurkers can found that nearly 90% of the communication was examine customer-submitted comments about what carried out by less than 10% of the members (Mason, others have purchased in the past in order to shape 1999). Recent estimates show the PI ratio for blogs opinions about potential purchases. Perhaps lurkers to be 95-5-0.1 and for Wikipedia to be 99.8-0.2-0.003 should be re-labeled as silent participants in order to (Nielsen, 2006). The problem with PI in online reduce the negative stigma associated with the word. communities is that the posted information is contributed by such a small fraction of the viewers When a lurker contributes to an online community or that the website is possibly not representative of the forum for the first time, this process is referred to as majority of Web users. This could lead to a biased delurking (Soroka & Rafaeli, 2006). There are many understanding of the community. Information posted reasons why a lurker may eventually choose to by users about products and services on ratings contribute. One reason may stem from the personal websites may need to be viewed with suspicion since desire to add value to an online community through the viewer doesn‘t know the poster and what basis the sharing of opinions (Nonnecke & Preece, 2001). was used for comments and opinions. The motives A participant in an online forum or community who of the poster may be unclear. contributes comments, rebuttals, ratings, or other feedback is a poster. There is very little published in SERVICE ELECTRONIC WORD OF MOUTH the literature about what sparks a lurker to delurk and Word of mouth communication, which can be become a poster. However, Soroka reports a defined as ―all informal communications directed at correlation between a positive first posting other consumers about the ownership, usage or experience followed by active participation in an characteristics of particular goods or their sellers‖ is online community (Soroka, Jacovi, & Ur, 2003). well established in academic literature (Westbrook, PARTICIPATION INEQUALITY 1987). Over the years, numerous studies have shown that word of mouth communication has a significant Several studies have shown lurkers to be the majority impact on consumer choice as well as post-purchase of members in online communities (J. Katz, 1998; perceptions (Bone, 1995; Engel, Blackwell, & Mason, 1999; Nonnecke & Preece, 2000). Today, Kegerreis, 1969; Hennig-Thurau & Walsh, 2004; E. almost all bidirectional websites are lurker-dominant Katz & Lazarfeld, 1955). Various forms of word of which results in a silent majority (Nielsen, 2006; mouth include both traditional word of mouth Nonnecke & Preece, 2001). These lurker-dominant (WOM) and electronic word of mouth (eWOM).
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Regardless of the form of word of mouth, the focus of the communication is the sharing of information regarding individuals‘ experiences with various RATEMYPROFESSORS.COM products and services. eWOM, much like e-mail communication, is an asynchronous process whereby RateMyProfessors.com was started in 1999 and is the sender and receiver of information are separated by first major application of SeWOM. The website both space and time. eWOM harnesses the allows students to rate their professors on a number bidirectional communication properties and unlimited of dimensions including helpfulness, clarity, easiness, reach of the Internet to share opinions and and overall quality. RMP dominates the competition experiences on a one-to-world platform rather than a such as Pick-A-Prof, Professor Performance, one-to-one platform (Dellarocas, 2003). The RateMyEverything, and the MySpace Professor electronic nature of eWOM eliminates the receiver‘s Ratings Forum. ability to judge the credibility of the sender and RMP is the Internet's largest listing of collegiate his/her message. In eWOM, the possibility of non- professor ratings. There are nearly seven million altruistic or profit motivated communication exists. student-generated ratings of over one million With the apparent differences between traditional professors from more than 6,000 schools across the WOM and eWOM, there has been an renewed United States, Canada, England, and Scotland. interest in researching word of mouth communication Furthermore, RMP claims more than nine million with a specific focus on the uses and impact of student users (www.ratemyprofessors.com). eWOM (Dellarocas, 2003; Fong & Burton, 2006; RMP is an interesting form of online rating service in Goldsmith & Horowitz, 2006; Hennig-Thurau & that students have no need to ever visit the website Walsh, 2004). Many of the eWOM applications again after completing college. It provides no value focus on product ratings on the Web. Consumers after graduation. It has not been studied as to appear to have a high level of comfort using websites whether incoming college students are aware of RMP like eBay, Amazon, CNET, and Epinions to look for and if they use it as part of their college selection products information from other users. To date, most process. of the academic research into eWOM has focused on product related eWOM or PeWOM. There is a EXPERIMENT AND RESULTS developing trend in online ratings towards the ratings of services, SeWOM. Websites such as We recently collected survey data from 482 current RateMyProfessors.com, The Ratingz Network, college students in which they rated the importance RateMyEverything.com and myrateplan.com have of various factors, including Service Electronic Word begun to emerge as forums for rating the otherwise of Mouth (through RateMyProfessors.com), on their intangible services, from professors and teachers to selection of university courses and professors. The laptop service to cell phone and cable service. demographics of the students are shown in Table 1. Services differ from products in that the quality level More than 75% of the test subjects described delivered by each professor varies by course and over themselves as heavy Internet users (see Table 2). time as opposed to books, music CDs, and other non- Nearly 97% of the students were aware of changing products. Our current research focuses on RateMyProfessors.com. Nearly 94% of the students perhaps the most developed and widely utilized that were aware of RMP had visited the website. SeWOM forum, RateMyProfessors.com (RMP), to Nearly 94% of the students that visited RMP have gain a better understanding of how SeWOM fits into used the website to help them select a professor for a the mix of information students seek prior to class (see Table 3). All of the students attend the consumption and how SeWOM influences the same university and it is quite clear that RMP is a students‘ ultimate choice of both course and heavily used SeWOM website. professor in the university setting.
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Table 1 spend a great deal of time on highly collaborative Demographics online community websites such as MySpace and Facebook. Additionally, they are used to interactive Average Age 21.54 years websites that require feedback in order to use the site. A good example of this type of website would be the Freshmen 0.21% immensely popular Hot or Not (www.hotornot.com). Sophomore 14.1% Junior 58.2% Our study yielded only 64% lurkers, with 9% infrequent contributors, and 27% regular contributors Senior 28.4% (64-9-27 ratio). We defined a lurker as a student who Male 56.4% has rated no professors in their entire college career, Business Major 70.8% an infrequent contributor as having rated one professor, and a regular contributor as having rated Non-Business Major 29.2% two or more professors (see Table 4). This is a Average GPA 3.1 dramatic difference from the normal 90-9-1 ratio and Average # of Friends 9.9 thus supports our hypothesis.
Table 4 Table 2 Number of professors rated on Internet Usage RateMyProfessors.com
Heavy User 75.4% # Profs Rated Frequency Percent Moderate User 23.0% 0 274 64.2 Light User 2.1% 1 38 8.9
Table 3 2 38 8.9 RateMyProfessors.com Usage 3 22 5.2 4 12 2.8 Aware of RMP 96.7% 5 15 3.5 Visited RMP 93.7% 6 3 0.7 Used RMP to select prof 93.9% 7 2 0.5 Rated a prof on RMP 35.8% 8 1 0.2 Not rated a prof on RMP 64.2% 9 1 0.2
We were very interested to see what level of lurkers 10 11 2.6 existed in our test group. One of our hypotheses 12 2 0.5 involved determining the participation inequality 15 4 0.9 ratio (if it in fact existed) and was stated as follows: 20 4 0.9 H-6: The percentage of RMP lurkers will be lower Total 427 100.0 than the standard 90-9-1 rule. We attribute this difference in lurker concentration We suspected that students would be much more between RateMyProfessors.com users and existing participative on the RMP website than in the lurker online community standards to multiple factors. The scenarios previously discussed. Today‘s students intangibility of services invites more subjective
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ratings (than products) and inspires the poster to rate Bone, P. F. (1995). Word of mouth effects on short- professors for the benefit of their fellow students term and long-term product judgments. Journal of (such as to save another student from a bad Business Research, 32, 213-223. experience or to encourage them to seek out highly- regarded professors). Most universities do not Dellarocas, C. (2003). The digitization of word of publish professors ratings and students are seeking to mouth: promise and challenges of online feedback make informed choices on the selection of their mechanisms. Management Science, 49 (10), 1407- teachers. There is great risk to students if they make 1424. poor choices of professors. The typical semester is three to four months long and an improper choice of Ebner, M., & Holzinger, A. (2005). Lurking: an professor could have dramatic impact on the student. underestimated human-computer phenomenon. IEEE Additionally, the RMP ratings and feedback form Multimedia, 12 (4), 70-75, that students fill out is very simple and takes very http://csdl.computer.org/dl/mags/mu/2005/04/u4070. little time to complete. The website is visually- htm. appealing and very easy to use and is a useful Engel, J. E., Blackwell, R. D., & Kegerreis, R. J. reference tool for students attempting to make (1969). How information is used to adopt an important decisions. The very high ratio of innovation. Journal of Advertising Research, 9 contributors lends credibility to the information that (December), 3-8. the students are seeking.
Fong, J., & Burton, S. (2006). Electronic word of CONCLUSION mouth: a comparison of stated and related behavior This study is the first known investigation of lurkers on electronic discussion boards. Journal of and participation inequality in service electronic Interactive Advertising, 6 (2), 61-70. word of mouth. Our hypothesis is supported that Goldsmith, R. E., & Horowitz, D. (2006). Measuring RMP as a SeWOM vehicle yields a much different PI motivations for online opinion seeking. Journal of ratio than the 90-9-1 rule with a PI ratio of 64-9-27. Interactive Advertising, 6 (2), 1-16. Further study of RateMyProfessors.com and other SeWOM websites is certainly warranted as there are Gunnarsson, B. L. (1997). The writing process from a emerging marketing, e-Business, and social sociolinguistic viewpoint. Written Communication, ramifications. It would be interesting to repeat this 14 (2), 139-188. study across several universities to see if similar PI ratios are generated. As SeWOM websites gain Hennig-Thurau, T., & Walsh, G. (2004). Electronic prominence, it would also be beneficial to conduct word-of-mouth:motives for and consequences of similar experiments that apply to them. reading consumer articulations on the Internet. International Journal of Electronic Commerce, 8 (2), REFERENCES 51-74.
Beaudoin, M. F. (2002). Learning or lurking? Hill, W. C., Hollan, J. D., Wroblewski, D., & Tracking the "invisible online student. The Internet McCandless, T. (1992). Edit wear and read wear. and Higher Education, 5 (2), 147-155. Paper presented at the Proceedings of the SIGCHI conference on Human factors in computing systems, Berelson, B. R., Lazarsfeld, P. F., & McPhee, W. N. Monterey, California, United States, 3-9. (1954). Voting. A study of opinion formation in a presidential campaign. Chicago, Illinois: The Katz, E., & Lazarfeld, P. F. (1955). Personal University of Chicago Press. influence. Glencoe, IL: Fee Press.
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Katz, J. (1998). Luring the lurkers. Nonnecke, B., & Preece, J. (2000). Lurker http://slashdot.org/features/98/12/28/1745252.shtml. demographics: counting the silent. Paper presented at the SIGCHI conference on Human factors in Kollock, P., & Smith, M. (1996). Managing the computing systems, The Hague, The Netherlands, 73- virtual commons: cooperation and conflict in 80. computer communities. Paper presented at the Computer-Mediated Communication: Linguistic, Nonnecke, B., & Preece, J. (2001). Why Lurkers Social and Cross-Cultural Perspectives, Amsterdam, Lurk. Paper presented at the Americas Conference on Netherlands, 109-128. Information Systems, Boston, Massachusetts, USA
Mason, B. (1999). Ethnographic studies in real and Soroka, V., Jacovi, M., & Ur, S. (2003). We can see virtual environments: inhabited information spaces you: a study of communities' invisible people through and connectedcommunities. Paper presented at the reachout. In Communities and technologies (pp. 65- Esprit i3 Workshop on Ethnographic Studies, 79): Kluwer, B.V. Edinburgh, Scotland, Queen Margaret College, 61- 69. Soroka, V., & Rafaeli, S. (2006). Invisible participants: how cultural capital relates to lurking Merriam-Webster. (2007). Merriam-Webster Online behavior. Paper presented at the 15th International Dictionary. http://www.merriam- Conference on World Wide Web, Edinburgh, webster.com/dictionary/. Scotland, 163-172.
Nielsen, J. (2006). Participation Inequality: Westbrook, R. A. (1987). Product/consumption- Encouraging More Users to Contribute. Retrieved based affective responses and postpurchase October 9, 2006, from processes. Journal of Marketing Research, 24 (3), http://www.useit.com/alertbox/participation_inequalit 258-270. y.html Whittaker, S., & Sidner, C. (1996). Email overload: Nonnecke, B. (2000). Lurking in email-based Exploring personal information management of discussion lists. Paper presented at the SCISM, email. Paper presented at the CHI'96, Vancouver, London, England, South Bank University BC, 276-283.
Whittaker, S., Terveen, L., Hill, W., & Cherny, L. (1998). The dynamics of mass interaction. Paper presented at the CSCW 98, Seattle, WA, 257-264.
Lawrence E. Burgee is an Assistant Professor of Marketing and e-Business at Towson University in Towson, Maryland. He received his Ph.D. in Information Systems from the University of Maryland, Baltimore County. His research interests include web usability, website localization, global e-Business, and mobile e-Business.
Erin M. Steffes is an assistant professor of Marketing and eBusiness at Towson University in Towson, Maryland. She received her PhD in Management Science with a concentration in Marketing from the University of Texas at Dallas. Her other research interests include customer lifetime value and profitability, affinity marketing, and online consumer behavior.
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THE EFFECTS OF SERVICE ELECTRONIC WORD OF MOUTH IN ACADEMIA Erin Steffes, Towson University Lawrence Burgee, Towson University
ABSTRACT There has been considerable academic research on word of mouth (WOM) and electronic word of mouth (eWOM). WOM is defined as informal communication between consumers sharing their experiences with products and services. eWOM, a form of WOM, is a collection of online feedback that harnesses the bidirectional communication capabilities of the Internet. The existing body of academic research with respect to eWOM has focused nearly exclusively on products. There is a paucity of eWOM research with respect to services. In this study, we seek to understand the effect of service electronic word of mouth (SeWOM) in a university setting with a focus on RateMyProfessors.com. We recently collected survey data from 483 current college students in which they rated the importance of various factors, including SeWOM, on their selection of university courses and professors. We found that students rate the importance of SeWOM to be equal to that of their own primary experiences, and superior to traditional WOM.
INTRODUCTION intimate conversation between two or more individuals, eWOM, much like e-mail Word of mouth communication, which can be communication, is an asynchronous process whereby defined as ―all informal communications directed at sender and receiver of information are separated by other consumers about the ownership, usage or both space and time. Second, while WOM is characteristics of particular goods or their sellers‖ is generally a process of sharing information between well established in academic literature (Westbrook small groups of two or more interested parties, 1987). Over the years, numerous studies have shown eWOM harnesses the bidirectional communication that word of mouth communication has a significant properties and unlimited reach of the Internet to share impact on consumer choice as well as post-purchase opinions and experiences on a one-to-world platform perceptions (e.g. Katz and Lazarfeld 1955, Engel et al rather than a one-to-one platform (Dellarocas 2003). 1969, Bone 1995, Hennig-Thurau and Walsh 2004). Third, traditional WOM emanates from a sender that Additional studies have shown the power of word of is known by the receiver of the information, thereby mouth over other forms of advertising. In certain the credibility of the sender and the message contents circumstances, word of mouth has a greater influence are known to the receiver. The electronic nature of over actual consumer behavior than personal selling, eWOM eliminates the receiver‘s ability to judge the print advertisements, and radio (e.g. Katz and credibility of the sender and his/her message. The Lazarfeld 1955, Engel et al 1969, Goldsmith and sharing of traditional WOM relies heavily on the Horowitz 2006). Various forms of word of mouth altruistic nature of the sender to pass information on include both offline communication (traditional) which the sender believes will be beneficial the user. word of mouth (WOM) and online communication Furthermore, the traditional framework for WOM (electronic) word of mouth (eWOM). Regardless of communication is without a profit motivation. When the form of word of mouth, the focus of the the known source of information found in WOM is communication is the sharing of information replaced by the unknown anonymous source of regarding individuals‘ experiences with various information in eWOM, the possibility of non- products and services. altruistic or profit motivated communication exists. Despite the fundamental similarities in purpose For example, authors of books could write favorable between traditional WOM and eWOM, significant reviews of their own manuscripts on Amazon.com. differences also exist. While WOM is an immediate Yet another difference between most traditional
forms of WOM and eWOM is the print factor; do professors from 6,000 schools across the United consumers lend more credibility to some opinions States, Canada, England, and Scotland‖. just because they are in print rather than verbal Furthermore, RateMyProfessors boasted more than 9 communications? million student users (www.ratemyprofessors.com). The emergence of SeWOM as a viable source of Perhaps because of these apparent differences information on services has just begun to attract between traditional WOM and eWOM, there has academic attention and research. Studies by Felton, been a renewed interest in researching word of mouth Mitchell and Stinson 2004, Felton et al. 2006, communication with a specific focus on the uses and Kindred and Mohammed 2005, Davison and Price impact of eWOM (e.g. Dellarocas 2003, Hennig- 2006, Riniolo, Johnson, Sherman, and Miso 2006, Thurau and Walsh 2004, Goldsmith and Horowitz and Coladarci and Kornfield 2007 have studied the 2006, Fong and Burton 2006). Many of the eWOM correlation among the factors of helpfulness, clarity, applications focus on product ratings on the Internet. easiness, overall quality and hotness in addition to the Consumers appear to have a high level of comfort relationship between RMP ratings and student using websites like eBay, Amazon, CNET and evaluations of teaching (SET). Epinions to seek products information from other users. Not surprisingly, most of the academic Despite its substantial size and apparent student research into eWOM focuses on product related popularity, there is a perception among faculty that eWOM or PeWOM. There is an emerging trend in RateMyProfessors is simply a joke or a game played online ratings towards the ratings of services, by students for the sole purpose of entertainment. SeWOM. Websites such as RateMyProfessors.com, There are numerous conversations on any given day The Ratingz Network, RateMyEverything.com and occurring on the Chronicle of Higher Education myrateplan.com have begun to emerge as forums for Forums related to the topic of rating the otherwise intangible services, from RateMyProfessors.com. The common themes which professors and teachers to laptop service to cell emerge from the postings are as follows: 1) most phone and cable service. Our current research students really don‘t use RMP ratings to choose their focuses on perhaps the most developed and widely classes, 2) students realize it is all fun and games, 3) utilized SeWOM forum, RateMyProfessors.com students who do rely on these rating systems are (RMP), to gain a better understanding of how dumb, 4) if you (the professor) don‘t like your own SeWOM fits into the mix of information students rating on RMP, simply rate yourself a number of seek prior to consumption and how SeWOM times or get a colleague to do it and you will feel influences the students‘ ultimate choice of both better about yourself. These beliefs held by course and professor in the university setting. academics do not seem to be supported by the sheer number of postings and users currently on RateMyProfessors, which began in May 1999, is the RateMyProfessors.com. first major application of SeWOM and allows students to rate their professors on a number of STUDY – Stage 1 dimensions including helpfulness, clarity, easiness, and overall quality. Students may also rate the To better understand the students‘ usage of professor as ―hot‖ or ―not hot‖ based on physical RateMyProfessors.com and the effect of SeWOM on attributes of the professor and record their overall student choice of course and professor, we comments on the professor. RateMyProfessors administered a survey to 482 students enrolled in dominates the competition such as Pick-A-Prof, either Principles of Marketing or Principles of Professor Performance, Campushopper, and eBusiness in spring 2007 at Towson University. The Reviewum. As stated on their website, survey contained 24 questions related to ―RateMyProfessors is the Internet's largest listing of RateMyProfessors.com usage, course selection, collegiate professor ratings, with more than 6.8 professor selection, and demographic information. million student-generated ratings of over 1 million A summary of demographic information can be
found in Table 1. As seen in the table, the ―average‖ STUDY – Stage 2 respondent was a junior, 21.5 years old, declared The goal of the next stage of our investigation was to business major, male, with a 3.13 grade point average determine to what extent our sample was using and approximately 10 friends. We felt that capturing RateMyProfessors.com. We asked students whether the number of close friends could give us an they were aware of RateMyProfessors.com, whether indication of whether the respondent was a they had ever visited RateMyProfessors.com, particularly solitary or social individual which may whether they had ever used RateMyProfessors.com to prove useful when investigating information seeking aid their selection of professor for a class, and finally behavior. Additionally, we captured overall Internet whether they had ever personally rated a professor on usage behavior, found in Table 2. The majority of RateMyProfessors.com and if so, how many. The our sample, 75.4%, classifies themselves as heavy results are summarized in Table 3. Not surprisingly, users, another 23% moderate users and only 2% light more than 96% of our sample was aware of users of the Internet. This distribution is not RateMyProfessors.com; of that nearly 94% had surprising, given the sample‘s age distribution and visited RateMyProfessors.com and 94% of those who student status. had visited used RateMyProfessors.com to select a class. What was more surprising was the fact that Table 1: Demographics only 36% of the students had ever themselves rated a Average Age 21.54 years professor, and of those that had rated approximately half of the students had rated two or fewer professors. Freshmen 0.21% Accounting for the fact that by junior year spring, most students have had 25-30 professors, one can see Sophomore 14.1% that students are only rating between 3% and 8% of their total professors. Junior 58.2% Table 3: RateMyProfessors.com Usage Senior 28.4% Aware of RMP 96.7% Male 56.4% Visited RMP 93.7% Business Major 70.8% Used RMP to select prof 93.9% Non-Business Major 29.2% Rated a prof on RMP 35.8% Average GPA 3.1% Number of profs rated 1.5 Average # of Friends 9.9%
STUDY – Stage 3 Table 2: Internet Usage The next stage of our investigation, perhaps the most Heavy User 75.4% important stage, was to determine how students were Moderate User 23.0% using the information they obtained on RateMyProfessors.com and how the students Light User 2.1% weighted that information in their decision process. We divided the process of registering for classes into two discrete steps. First, we asked the students about their information gathering process for choosing
which course to take and second, we asked the Table 5: Summary of ANOVA students about the information gathering process for Results for Course Selection choosing which professor to take. We asked the students to rate on a five point scale with 1=Very F value Pr>F Important, 2= Somewhat Important, 3=Neutral, 4= Somewhat Unimportant, and 5=Very Unimportant 36.32 <.0001 the following factors related to course selection: 1)
Necessity of course for degree plan, 2) Day of week configuration, 3) Time of class meeting, 4) The second part of this investigation was to Availability of preferred professor, and 5) Academic determine how the various factors influence students advisor recommendation. We also allowed the with respect to selection of individual professors. students to write in another factor if necessary. Table Again, we asked students to rate with 1=Very 4 summarizes the results which indicate that Important, 2= Somewhat Important, 3=Neutral, 4= necessity for degree plan was the most influential Somewhat Unimportant, and 5=Very Unimportant, factor, followed by time and day of class meeting, the following factors: 1) Talking with friends in and then availability of preferred professor and person, telephone or e-mail, 2) Professor teaches in advisor recommendation. Table 5 summarizes the preferred time slot, 3) Academic advisor ANOVA results for the course selection factors. We recommendation, 4) RateMyProfessors.com, 5) then used the Student-Newman-Keuls Test for Taken the professor for a previous class, and 6) No equality of means to confirm at an α=0.05, the factors choice of professor for given course. Again, we also are significantly different. Finally, we asked students allowed the students to write in another factor if to report which factor was the most influential factor necessary. Table 6 summarizes the results for the over their selection of courses, 50% of students choice of professor decision. We find that, contrary indicated that necessity of course for degree plan was to professors‘ beliefs, students are heavily relying on the single most important factor, followed by RateMyProfessors.com to make their choice of availability of preferred professor at 23%. professor each semester. RateMyProfessors.com was tied for most important factor with primary Table 4: Factors of Influence: Course Selection experience with the professor and was more important than speaking to friends in person, phone Factor Mean Value Rank or e-mail regarding professors. This finding is most Necessity to Degree surprising given the fact that students know their Plan 1.34 1 friends and presumably are able to assign a level of source credibility to these conversations, yet students Time of Day 1.72 2* rely more heavily on information from an unknown source through RateMyProfessors.com. Table 7 Day of Week 1.83 2* summarizes the ANOVA results for the professor selection factors. Once again, we used the Student- Preferred Professor Newman-Keuls Test for equality of means to confirm Teaches Course 1.97 3* at an α=0.05, the factors are significantly different as noted in Table 6. Finally, we asked students to report Advisor which factor was the most influential factor over their Recommendation 1.97 3* choice of professors. We found that 41% of students * = tie indicate that RateMyProfessors was the single most important factor, followed by time slot at 21%, talking with friends at 17% and taken the professor previously at 15%. Clearly we find evidence that
many students are utilizing RateMyProfessors.com to REFERENCES help them choose professors and that RateMyProfessors.com is a highly influential factor Bone, P.F. (1995), ―Word of Mouth Effects on Short- in these decisions. term and Long-term Product Judgments‖, Journal of Business Research, 32, 213-223. Table 6: Factors of Influence: Professor Selection Coladarci, T. and I. Kornfield (2007), Factor Mean Value Rank ―RateMyProfessors.com versus Formal In-class Student Evaluations of Teaching‖, Practical Taken for a Previous Course 1.7 1* Assessment, Research and Evaluation, 12 (6), 1-15.
RateMyProfessors.com 1.76 1/2* Davidson, E., and J. Price (2006), ―How do We Rate? Am Evaluation of Online Student Evaluations‖, Time of Class 1.87 2* Unpublished manuscript retrieved from http://www1.appstate.edu/~pricej1/TEACHING/meth Talk with Friends 2.14 3 ods/RMP_8_06.pdf No Choice of Professor 2.45 4 Dellarocas, C. (2003), ―The Digitization of Word of Advisor Recommendation 2.72 5 Mouth: Promise and Challenges of Online Feedback Mechanisms‖, Management Science, 49 (10), 1407- 1424. * = tie Engel, J.E., Blackwell, R.D. and R.J. Kegerreis Table 7: Summary of ANOVA (1969), ―How Information is Used to Adopt an Results for Course Selection Innovation‖, Journal of Advertising Research, 9, December, 3-8. F value Pr>F Felton, J., Mitchell, J. and Stinson, M. (2004), ―Web- 96.93 <.0001 based Student Evaluations of Professors: the Relations between Perceived Quality, Easiness and
Sexiness‖, Assessment and Evaluation in Higher CONCLUSION Education, 29 (1), 91-108.
In conclusion, our research shows that students are Felton, J., Koper, P.T., Mitchell, J.B., and M. Stinson relying heavily on SeWOM through (2006),‖Attractiveness, Easiness, and Other Issues: RateMyProfessors.com in their choice of professors. Student Evaluations of professors on Interestingly, they rate the importance of the RateMyProfessors.com‖, from information they acquire through SeWOM as http://ssrn.com/abstract=918283 superior to that they gather through conversations Fong, J. and S. Burton (2006), ―Electronic Word of with their friends. The vast majority of the sample is Mouth: A Comparison of Stated and Related aware of the existence of SeWOM in the category of Behavior on Electronic Discussion Boards‖, Journal college professors and sought out SeWOM, at least to of Interactive Advertising, 6 (2), Spring, 61-70. some extent, to facilitate their purchase decision.
Goldsmith, R.E. and D. Horowitz (2006), ―Measuring
Motivations for Online Opinion Seeking‖, Journal of Interactive Advertising, 6 (2), Spring, 1-16.
Hennig-Thurau, T. and G. Walsh (2004), ―Electronic Katz, E. and Lazarfeld, P.F. (1955), Personal Word-of-Mouth: Motives for and Consequences of Influence, Fee Press, Glencoe, IL. Reading Consumer Articulations on the Internet‖, International Journal of Electronic Commerce, 8 (2), Riniolo, R.C., Johnson, K.C., Sherman, T.R. and J.A. Winter, 51-74. Misso (2006), ―Hot or Not: Do Professors Perceived as Physically Attractive Receive Higher Kindred, J. and S.N. Mohammed (2005), ―‘He Will Evaluations?‖, The Journal of General Psychology, Crush You Like an Academic Ninja!‘: Exploring 133 (1), 19-35. Teacher Ratings on RateMyProfessors.com‖, Journal of Computer-Mediated Communication, 10 (3), Westrbook, R.A. (1987), ―Product/consumption- article 9 from based Affective Responses and Postpurchase http://jcmc.indiana.edu/vol10/isue3/kindred.html. Processes‖, Journal of Marketing Research, 24 (3), August, 258-270.
Erin M. Steffes is an assistant professor of Marketing and eBusiness at Towson University in Towson, Maryland. She received her PhD in Management Science with a concentration in Marketing from the University of Texas at Dallas. Her other research interests include customer lifetime value and profitability, affinity marketing, and online consumer behavior.
Lawrence E. Burgee is an Assistant Professor of Marketing and e-Business at Towson University in Towson, Maryland. He received his Ph.D. in Information Systems from the University of Maryland, Baltimore County. His research interests include web usability, website localization, global e-Business, and mobile e-Business.
Program Northeastern Association of Business Economics and Technology (NABET)
30th Annual Meeting October 25th & 26th, 2007
Day‘s Inn 240 South Pugh St. State College, PA 16801 (814) 238 - 8454
NORTHEASTERN ASSOCIATION
of
Business, Economics and Technology
(NABET)
Thirtieth Annual Meeting
PROGRAM
NABET Annual Meeting October 25th & 26th, 2007
NABET Conference Presenters and Attendees,
On behalf of the Executive Board of NABET, welcome to our thirtieth annual meeting. We are very pleased that you have come to join us. Even though this is our thirtieth annual conference, it is our first conference as a truly regional organization. Over the two days of this conference, there will be a mix of 87 presentations of scholarly papers and workshops from 53 colleges and universities from eight states (Pennsylvania, Ohio, New York, New Jersey, Delaware, Maryland, Virginia and West Virginia). The topics of the papers cover a wide range within the business disciplines and Economics. Please note that the Conference will start each day with breakfast and a common session. After the first session there will be a refreshment break and then there will be concurrent sessions involving four meeting rooms. The last session on Thursday will be a common session wherein the Faculty Best Paper Award winner will present his/her paper. If you are not a presenter this year, please consider presenting next year. I hope that you enjoy your experiences at the NABET Conference.
Dean Frear NABET Conference Chair
THURSDAY, OCTOBER 25, 2007: SYLVAN ROOM
7:30 am - 9:00 Registration Breakfast Linden Room
8:00am - 8:15am Norman Sigmond, President Welcome
8:15 am – 9:15 am Session 1 Session Chair: …………………………….. Sanjay Paul
Operational Profile and the Behavior of the Small Enterprises: Reflections from the Urban Child Care Centers M. Ruhul Amin Bloomsburg University of Pennsylvania Ahmed Zaman Borough of Manhattan Community College
Educating Entrepreneurs: Lessons from the Fine Arts James Donaldson Juniata College Karen Rosell Juniata College
Researching the Survival and Growth of Small Businesses in Northeastern Pennsylvania: Some Conceptual Issues and Preliminary Findings Akinola O. Fadahunsi Penn State University – Scranton Parminder Parmar Penn State University – Scranton Kim Neesan-Johnson Penn State University – Scranton
9:15 am – 9:30 am Coffee Break Linden Room
9:30 am – 10:30 am Session 2 Session Chair: …………………………….. Marlene Burkhardt
Entrepreneurship, Bankruptcy Laws and Economic Activity Sanjay Paul Elizabethtown College Sean Melvin Elizabethtown College
The Need For Hispanic-Owned Businesses To Target Non-Hispanic Customers, Vendors And Service Providers Roger Hibbs Kutztown University of Pennsylvania Scott Schaeffer Kutztown University, SBDC
Entrepreneurship: Business's Liberal Art Donald R. Mong Slippery Rock University of Pennsylvania
THURSDAY, OCTOBER 25, 2007: SYLVAN ROOM
10:30 am – 10:45 am Coffee Break Linden Room
10:45 am – 11:45 am Session 3
Session Chair: …………………………….. Roger Hibbs
A Comprehensive Exercise Using Video Podcasting Gary Armstrong Shippensburg University of Pennsylvania
We Are Who We Meet Marlene Burkhardt Juniata College
Weaving Storytelling into an Organizational Behavior Curriculum: Building Competencies Joan Blewitt Kings College Ftr. John Ryan Kings College
12:00 pm – 1:00 pm Lunch Linden Room
1:15 pm – 2:15 pm Session 4
Session Chair: ………………………………… Alan Brumagim
A Study of Advising Resources Perceived by First-Year Students and Transfer Students April Bailey Shippensburg University of Pennsylvania Margaretha Hsu Shippensburg University of Pennsylvania
Does Friendship Matter? Ethical Decision Making And Undergraduate College Students Carol C. Cirka Ursinus College Justin Traino Ursinus College
THURSDAY, OCTOBER 25, 2007: SYLVAN ROOM
2:15 pm – 3:15 pm Session 5
Session Chair: …………………………….. April Bailey
Simulating A Business Operation In The Classroom Alan Brumagim University of Scranton
Curricular Response to Global Aging Elizabeth Elmore The Richard Stockton College of New Jersey
Do You See What I See? Desired Learning Outcomes And Achieved Learning Outcomes In International Strategic Alliance Steven X. Si Bloomsburg University of Pennsylvania Minuddin Afza Bloomsburg University of Pennsylvania
3:15 pm – 3:30 pm Coffee Break Linden Room 3:30 pm – 4:30 pm Session 6 Session Chair: …………………………….. Carol C. Cirka
A Comparison Of Three Assessment Tools For Business Schools Carl J. Chimi Bloomsburg University of Pennsylvania Carolyn Lamacchia Bloomsburg University of Pennsylvania David Martin Bloomsburg University of Pennsylvania
Freshman Seminar in Business: A Report on a Field Experiment Eileen A. Hogan Kutztown University of Pennsylvania
4:30 pm – 5:00 pm **Winner of NABET Best Faculty Paper Award** Fertility, Money Holdings, and Economic Growth: Evidence from Ukraine Svitlana Maksymenko University of Pittsburgh
5:15 pm – 6:00 pm Executive Board Meeting
6:00 pm - 7:00 pm NABET Social Hour I**Windsor Suite Rm 208
7:00 pm Dinner Linden Room 8:00 pm - ?? NABET Social Hour II** Windsor Suite Rm 208 THURSDAY, OCTOBER 25, 2007: WILLOW ROOM
9:15 am – 9:30 am Coffee Break Linden Room
9:30 am – 10:30 am Session 2
Session Chair: …………………………….. Jerry D. Belloit Patented Tax Loopholes-Policy And Practical Considerations John D. Grigsby Lebanon Valley College
The Association Between Corporate Governance And Audit Fees Cindy K. Harris Ursinus College
Horses, Real Estate and the Hobby Loss Debate Barry Williams Kings College
10:30 am – 10:45 am Coffee Break Linden Room
10:45 am – 11:45 am Session 3
Session Chair: …………………………….. Barry Williams
Rate Of Employer Contribution For The Alternate Retirement Program Monayem Chowdhury Cheyney University of Pennsylvania
Alternative Energy Tax Subsidies:An Analysis of Costs and Benefits to the Taxpayer and Public Jerry D. Belloit Clarion University of Pennsylvania
Does the Sale of Subdivided Land Create Capital Gain or Ordinary Income? Anthony Grenci Clarion University of Pennsylvania Jerry D. Belloit Clarion University of Pennsylvania
12:00 pm – 1:00 pm Lunch Linden Room
THURSDAY, OCTOBER 25, 2007: WILLOW ROOM
1:15 pm – 2:15 pm Session 4 Session Chair: ………………………………… John S. Walker
A Binary Choice Model For Predicting Bank Acquisitions Henry F. Check, Jr. Kutztown University of Pennsylvania John S. Walker Kutztown University of Pennsylvania
Investment Returns and Performance Attribution in Public Pension Systems Karen L. Randall Ursinus College Alexander J. Miron Ursinus College
Estimating Toll Plaza Flow Performance Using Computer Simulations: Designing and Managing Plaza Performance Jonathan R. Peters The City University of New York-Staten Island Jonathan K. Kramer Kutztown University of Pennsylvania Michael E. Kress The City University of New York-Staten Island
2:15 pm – 3:15 pm Session 5 Session Chair: …………………………….. Jonathan K. Kramer
An Income Tax Explanation for "Irrational" Early Exercises of Exchange-Traded Stock Options: A Note Stephen L. Liedtka DeSales University Nandkumar Nayar Lehigh University
Does Yearend Portfolio Restructuring By Community Banks Boost Shareholder Returns ? John S. Walker Kutztown University of Pennsylvania Henry F. Check, Jr. Kutztown University of Pennsylvania
The Influence Of U.S. Presidential Elections On Exchange Rates Dean F. Frear Wilkes University Jennifer Edmonds Wilkes University
3:15 pm – 3:30 pm Coffee Break Linden Room
Activities resume in Sylvan Room
THURSDAY, OCTOBER 25, 2007: HOLMES/FOSTER ROOM 9:15 am – 9:30 am Coffee Break Linden Room
9:30 am – 10:30 pm Session 2 Session Chair: …………………………….. W. R. Eddins
Corporate Speech, Ethics & Disinformation:From Tobacco to Global Warming Bruce L.Rockwood Bloomsburg University of Pennsylvania
Code Of Ethics Under Construction: A Blueprint For A National Professional Organization Carol C. Cirka Ursinus College Carla M. Messikomer Ursinus College
The Constitutional, Arbitration, and the Rule of Law Garry Wamser Bloomsburg University of Pennsylvania
10:30 am – 10:45 am Coffee Break Linden Room
10:45 am – 11:45 pm Session 3 Session Chair: …………………………….. Bruce L.Rockwood
Lurkers and Participation Inequality in Service Electronic Word of Mouth Larry Burgee Towson University Erin Steffes Towson University
Hospitality Industry’s Perceptions of Hospitality Management Graduates’ Preparedness Donna Albano The Richard Stockton College of New Jersey Michael Scales The Richard Stockton College of New Jersey
12:00 pm – 1:00 pm Lunch Linden Room
THURSDAY, OCTOBER 25, 2007: HOLMES/FOSTER ROOM
1:15 pm – 1:55 pm Session 4 Session Chair: ……………………………… Monica Zimmerman Treichel
Knowledgeable Decision Making: Does Source of Knowledge Impact Effective Use of Information Technology? CJ Rhoads Kutztown University of Pennsylvania
The Effects of Service Electronic Word of Mouth in Academia Erin Steffes Towson University Larry Burgee Towson University
1:55 pm – 2:40 pm Session 5
Session Chair: ………………………………… Erin Steffes
Workshop 1
The Importance of Effective Communication in Business Education: How to Incorporate Effective Business Communication in Business School Curriculum Monica Zimmerman Treichel Temple University Janis Moore Campbell Temple University
2:40 pm – 3:25 pm Workshop 2
Session Chair: …………………………….. CJ Rhoads Visible Product: Projects, Posters and Power Point Karen L. Randall Ursinus College Marlene Burkhardt Juniata College
3:15 pm – 3:30 pm Coffee Break Linden Room
Activities resume in Sylvan Room
THURSDAY, OCTOBER 25, 2007: LOGAN/HARRIS ROOM
9:15 am – 9:30 am Coffee Break Linden Room
9:30 am – 10:30 am Session 2
Session Chair: …………………………….. Farhad Saboori
Three High Risk Health Characteristics And Their Consequences On Employees Marc C. Marchese Kings College Bernard Healey Kings College
Designing A Laptop Survey At A Pennsylvania College: A Precursor To Introducing Innovative Technologies W. R. Eddins York College of Pennsylvania
10:30 am – 10:45 am Coffee Break Linden Room
10:45 am – 11:45 am Session 3
Session Chair: …………………………….. Marc C. Marchese
The Impact of Rising Oil Prices on the U.S. Economy: An Empirical Analysis Farhad Saboori Albright College
12:00 pm – 1:00 pm Lunch Linden Room
THURSDAY, OCTOBER 25, 2007: LOGAN/HARRIS ROOM
1:15 pm – 2:15 pm Session 4
Session Chair: ………………………………… Edward J. Fox Environment, Income Inequality and Health in US Counties. Martina Vidovic. Bloomsburg University of Pennsylvania Neha Khanna Bloomsburg University of Pennsylvania
South Central Pennsylvania: Tracking the Regional Economy Ken Slaysman York College of Pennsylvania
Economic Espionage Today And The Economic Espionage Act Of 1996 Vince Luchsinger University of Baltimore
2:15 pm – 3:15 pm Session 5
Session Chair: …………………………….. Martina Vidovic
Why Is Selling Not Taught In The Pennsylvania University Environment Edward J. Fox South University
Barking Up The Wrong Ethnic Tree: Ethnic Marketing Needs An Emic Definition Of Ethnicity Ed Chung Elizabethtown College
Models Describing Loyalty and the Apparent Mismatch Between the Marketer and the Consumer Jefrey Woodall York College of Pennsylvania
3:15 pm – 3:30 pm Coffee Break Linden Room
Activities resume in Sylvan Room
FRIDAY, OCTOBER 26, 2007: SYLVAN ROOM 7:30 am – 9:00 am Registration Breakfast Linden Room
7:45 am - 8:15am Norman Sigmond, President Welcome Day 2 NABET Annual Fall Business Meeting All conference participants may attend Norman Sigmond, President
8:15 am –9:15 am Session 1 Session Chair: …………………………….. Charles Walton
Determinants of Class Participation: A Preliminary Investigation Justin C. Matus Wilkes University Robert D. Kuschke University of Missouri
Start Your Own Business: A Synthesizing Final Group Project in the Introductory Business Course Leon Markowicz Lebanon Valley College
Assessing Writing Across the Business Core Nancy Coulmas Bloomsburg University of Pennsylvania Stephen Markell Bloomsburg University of Pennsylvania
9:15 am – 9:30 am Coffee Break Linden Room and Hotel Checkout
9:30 am – 10:30 am Session 2 Session Chair: …………………………… Eric L. Blazer
College Trustee Governance: Augmenting Carver's Policy Governance with Accepted Control and Planning Systems Charles Walton Gettysburg College Spring Walton University of Maryland, University College
Teaching Online & Hybrid Accounting Courses: Experience at a Mid-Atlantic University Faye Bradwick Indiana University of Pennsylvania
Evaluating the Impact of Integrated Business Curricula on Student Outcomes: Implications of Curriculum Transformation to Make Students More Marketable John Buttermore Slippery Rock University of Pennsylvania 10:30 am – 10:45 am Coffee Break Linden Room
Friday, October 26, 2007: Sylvan Room 10:45 am – 11:45 am Session 3 Session Chair: …………………………….. John Buttermore
A Case Study Augmenting Carver's Policy Governance with Accepted Control and Planning Systems in a Community College Charles Walton Gettysburg College Spring Walton University of Maryland, University College
An Attitudinal Survey of Classroom Response Systems Eric L. Blazer Millersville University of Pennsylvania
WiLife's Indoor Surveillance Camera and Its Contract Manufacturers in China Gabriel Jaskolka Tiffin University Al Mudrow Tiffin University
12:00 pm – 1:00 pm Lunch Linden Room
1:15 pm – 2:15 pm Session 4 Session Chair: ………………………………… James Talaga
Couponing Strategies in Location-based Advertising Prashant Bellur Ithaca College
Customer Satisfaction Measurement and the Effective Management of Customer Services Jonathan Silver Alvernia College
Income Density and Market Potential in Pennsylvania Small Towns William Bellinger Dickinson College
2:15 pm – 2:30 pm Coffee Break, Linden Room
2:30 pm – 3:30 pm Session 5 Session Chair: …………………………….. Jonathan Silver
Data Warehouse Development: Is There A "Best Practice"? Mary Williams Widener University Robert G. Jones Widener University
Fantasy Sports and Sports Marketing James Talaga La Salle University Christopher Orzechowski Cardiology Consultants of Philadelphia
Arguably, No One Knows More About Candy or Technology Than Teens Arlene Peltola Cedar Crest College
FRIDAY, OCTOBER 26, 2007: WILLOW ROOM
9:15 am – 9:30 am Coffee Break Linden Room and Hotel Checkout
9:30 am – 10:30 am Session 2
Session Chair: …………………………… Gary Leinberger
The Ambiguities of Neo-Classical Globalization??? Mohammed Sidky Point Park University Dimitris J. Kraniou Point Park University
10:30 am – 10:45 am Coffee Break Linden Room
10:45 am – 11:45 am Session 3
Session Chair: …………………………….. Mohammed Sidky
An Empirical Study of Undergraduate Student's Basic Finance Management Achievement Relative to Student Background and Prerequisite Timing. Gary Leinberger Millersville University of Pennsylvania Douglas Frazer Millersville University of Pennsylvania
Impact Of Strategy On Firm Performance In An Emerging Market: An Empirical Examination Of Turkish Insurance Industry J Rajendran Pandian Youngstown State University Ilyas Akhisar Marmara University
Market Efficiency in the Post-Lockout NHL: Eliminating the Reverse Favorite-Longshot Bias Rodney J. Paul Saint Bonaventure University Andrew P. Weinbach Coastal Carolina University Mark Wilson St. Bonaventure University
12:00 pm – 1:00 pm Lunch Linden Room
FRIDAY, OCTOBER 26, 2007: WILLOW ROOM
1:15 pm – 2:15 pm Session 4
Session Chair: ………………………………… Mark L. Usry
An Empirical Analysis of the Determinants of Foreign Direct Investment with a Focus on Asia Katarina Keller Susquehanna University Andrew Gilbert Price Waterhouse Coopers, LLP Anne Stankiewicz Goldman Sachs Group Ltd.
A Correlation Analysis of Price of Corn and Price of Gasoline Joseph Cheng Ithaca College
Comparative Analysis on the Major Determining Factors for the Performance of PGA and LPGA Golfers Jonathan Ohn Bloomsburg University of Pennsylvania
2:15 pm – 3:15 pm Session 5
Session Chair: …………………………….. Joseph Cheng
Is there a Relationship between Corruption and Job Creation in Resource Rich Oil and Gas Developing Countries? Olumide Ijose Slippery Rock University of Pennsylvania Jesus Valencia Slippery Rock University of Pennsylvania
Negligent Hiring Mark L. Usry Bloomsburg University of Pennsylvania
Execution, the Secret to Great Performance David E. Vance Rutgers University
FRIDAY, OCTOBER 26, 2007: HOLMES/FOSTER ROOM
9:15 am – 9:30 am Coffee Break Linden Room and Hotel Checkout
9:30 am – 10:10 am Session 2 Workshop 1 Session Chair: …………………………… Anne McMahon
Technology in the Classroom: Improving Class Participation Justin C. Matus Wilkes University
10:10 am – 10:20 am Setup time for next workshop
10:20 am – 11:00 am Workshop 2
Session Chair: …………………………… Justin C. Matus
Assessing Diversity Outcomes in a College of Business Management Curriculum Anne McMahon Youngstown State University Andy Chang Youngstown State University Carol Mikanowicz Youngstown State University C. Louise Sellaro Youngstown State University
11:00 am – 11:10 am Setup time for next workshop Session 3
Workshop 3 11:10 am – 11:50 am Session Chair: …………………………….. Brian J. Petula
A Serendipitous Walk to Investing Literacy: Engaging College Students to Think Critically About Investing Using a Collaborative Teaching Model Patricia Weaver Juniata College Paula Beckenbaugh Juniata College
12:00 pm – 1:00 pm Lunch Linden Room
FRIDAY, OCTOBER 26, 2007: HOLMES/FOSTER ROOM
` 1:00 pm – 1:10 pm Set up time for next workshop Session 4
1:10 pm – 1:50 pm Workshop 4 Session Chair: ………………………………… Patricia Weaver Enhancing the MBA Learning Experience with Service Learning Brian J. Petula Marywood University U. Rex Dumdum Marywood University Paula Ralston Nenish Penn Security Corporation Cindy Lewis-Kessler Sanofi, Pasteur
1:50 pm – 2:00 pm Set up time for next workshop Session 5 2:00 pm – 2:40 pm
Workshop 5
Session Chair: …………………………….. Brian J. Petula
Using Computerized Simulations in Accounting Courses Stanley J. Yerep University of Pittsburgh at Johnstown Deborah Smiach-Zakrawski University of Pittsburgh at Johnstown
FRIDAY, OCTOBER 26, 2007: LOGAN/HARRIS ROOM
9:15 am – 9:30 am Coffee Break Linden Room and Hotel Checkout
9:30 am – 10:30 am Session 2
Session Chair: …………………………… John A. Kruglinski Beyond Statistics: Data Mining in the 21st Century Curriculum Deborah Gougeon University of Scranton
Contract Design for Quality Control in Supply Chain Management Nanyun Zhang Towson University
10:30 am – 10:45 am Coffee Break Linden Room
10:45 am – 11:45 am Session 3
Session Chair: …………………………….. Deborah Gougeon Selling a Government Owned Enterprise in China Dan Benson Kutztown University of Pennsylvania Roger Hibbs Kutztown University of Pennsylvania
Effectively Addressing Enterprise Compliance Risk John A. Kruglinski Kutztown University of Pennsylvania
Toward an Understanding of Auditor Rotation as Public Policy: Theories of Deviant Behavior A. Blair Staley Bloomsburg University of Pennsylvania Wilmer Leinbach Bloomsburg University of Pennsylvania Mark L. Usry Bloomsburg University of Pennsylvania Mike Shapeero Bloomsburg University of Pennsylvania
12:00 pm – 1:00 pm Lunch Linden Room
FRIDAY, OCTOBER 26, 2007: LOGAN/HARRIS ROOM
` 1:15 pm – 2:15 pm Session 4 Workshop 1 Session Chair: ………………………………… Henry Barker
Accounting Educators Dialogue Panel Members Faye Bradwick Indiana University of Pennsylvania Scott Cairns Shippensburg University of Pennsylvania Joyce Middleton Frostburg State University Ann Servey Cabrini College Gail Wright Villa Julie College
2:15 pm – 3:15 pm Session 5
Session Chair: …………………………….. Faye Bradwick The Transition from Online Learning to the Virtual Classroom Henry Barker Tiffin University
Why Most New Product Usually Fail and Why Only Some Succeed Okan Akcay Kutztown University of Pennsylvania